Three-way clash among MPC over QE

TENSIONS on the Bank of England&rsquo;s monetary policy committee (MPC) came to a head in November as members clashed in a three-way split over the way forward for its quantitative easing (QE) policy, the minutes of its last meeting showed yesterday.<br /><br />The committee voted unanimously to keep interest rates on hold at 0.5 per cent at the meeting earlier this month, but seven members &ndash; including governor Mervyn King &ndash; voted to increase the asset purchase programme by &pound;25bn to &pound;200bn.<br /><br />Chief economist Spencer Dale voted to keep the level of QE on hold, arguing that previous monetary policy changes had been &ldquo;extraordinarily stimulatory&rdquo; and that there would be a danger of inflation overshooting the two per cent target if the policy were extended. He said further substantial injections of liquidity could lead to sharply rising asset prices that would be costly to rectify in the future.<br /><br />And the committee was further divided by David Miles, a lone voice advocating a greater expansion of &pound;40bn to QE &ldquo;to provide greater insurance against the downside risks to growth and inflation arising from constrained credit supply&rdquo;.<br /><br />The three-way split, the MPC&rsquo;s first for over a year, demonstrates the perilously fine line policymakers are treading between boosting economic recovery and tipping the UK into an inflationary spiral.<br /><br />&ldquo;A number of members&rdquo; noted that November&rsquo;s extension of QE was likely to bring forward the point where policy would need to be tightened, the minutes revealed.<br /><br />&ldquo;This suggests a significant body on the committee viewed the extension as a belt-and-braces provision of extra insurance,&rdquo; said Simon Hayes, an analyst at Barclays Capital. <br /><br />The MPC also noted that the floated policy of charging more on commercial bank reserves would be unlikely to stimulate lending.&nbsp; <br /><br />Analysts said discussion surrounding the possibility was unlikely to lead to its implementation in the future unless the economic situation deteriorates <br />considerably. <br /><br />Citigroup&rsquo;s Michael Saunders said: &ldquo;Having rejected this option now, when ultra-low policy rates and QE create a demand for unconventional stimulus, it is highly unlikely the MPC will ever judge it appropriate.&rdquo;<br /><br /><strong>DAVID MILES<br />THE MPC&rsquo;S NEW DOVE<br /></strong>DAVID Miles, the man who replaced Professor David Blanchflower on the Bank of England&rsquo;s MPC at the end of May, is fast assuming his predecessor&rsquo;s role as the arch-dove of the committee.<br /><br />Blanchflower had voted consistently to reduce interest rates every month between October 2007 and March this year, when the base rate reached its current 0.5 per cent level &ndash; putting him firmly at loggerheads with his colleagues, who insisted fears over rising inflation should take precedent.<br /><br />Of course, since a proposal to reduce the current historically low interest rate further is not on the agenda, Miles&rsquo; dovishness is emerging only with his stance on quantitative easing.<br /><br />At the beginning of August, having been on the committee for just two short months, Miles was one of three members who voted for a sharper increase in QE than his peers. He, along with governor Mervyn King and former MPC member Tim Besley, voted to extend the programme by &pound;75bn to &pound;200bn, rather than the &pound;50bn raise that was implemented. <br /><br />And this month, for the second time, Miles showed himself prepared to go out on a limb as the lone member in support of a heavier increase in the programme (by &pound;40bn to &pound;215bn, rather than settling for a &pound;25bn rise).<br /><br /><strong>SPENCER DALE<br />THE HAWK ON THE COMMITTEE</strong><br />WHERE Miles has established himself as the committee&rsquo;s most dovish member, Spencer Dale, the chief economist, yesterday took flight as its resident hawk &ndash; in economic parlance, one of those motivated by the fear of rising inflation.<br /><br />So far, since joining the MPC last year, Dale&rsquo;s views have been closely aligned with the rest of the members. He voted consistently, along with the majority, to cut interest rates steadily over the course of the crisis, and has also been in tandem with his peers regarding quantitative easing since the policy was introduced earlier this year.<br /><br />Yet analysts yesterday said his decision to hold fast on the &pound;175bn level of QE at November&rsquo;s meeting was a significant one. &ldquo;Dale&rsquo;s dissension is noteworthy because it suggests he is more hawkish even than Andrew Sentance, who this week warned about inflationary dangers,&rdquo; said BarCap&rsquo;s Simon Hayes in a note yesterday.<br /><br />Sentance &ndash; who on Monday said inflation could rise above the target unless the Bank does not &ldquo;tighten policy to some degree&rdquo; &ndash; went along with the majority at the November meeting by voting to increase QE by &pound;25bn to &pound;200bn, but Dale should certainly be able to count on him for support in the critical coming months.