CITY ALARMED BY BANK SPLIT
CITY economists expressed concern yesterday about the fragility of the UK economy after it emerged that Bank of England governor Mervyn King had pushed to extend quantitative easing (QE) by £75bn earlier this month.
Economists were shocked to learn that the Bank’s policymakers had been divided over how much to extend QE.
Minutes from the August meeting revealed that King and two colleagues argued to extend the asset-purchase programme by £75bn, rather than the £50bn that was voted in.
The news surprised the market, which expected the vote to have been unanimous. Instead, it was a six to three split, with King backed by Tim Besley and David Miles.
The trio argued that the potential risks attached to adding another large monetary stimulus might be “less severe than the possible costs of acting too cautiously”.
But Citigroup analyst Michael Saunders criticised their stance yesterday, warning that too much stimulus could send inflation sky-high and accusing the Bank of “flying blind”.
“Amidst huge uncertainty, they would rather err on the side of too much stimulus rather than too little, and appear unconcerned at present that their approach could produce a messy exit strategy later on,” he said.
Saunders suggested that the economy could already be showing signs that the level of stimulus is too high, with asset prices rising and signs of an early recovery appearing.
“It is possible that these are signs that QE is far more powerful than we expected,” he said.
The minutes delivered the market’s third shock this month, following the news of the QE extension itself and Tuesday’s news that July inflation had remained level at 1.8 per cent.
Analysts said that the debate suggests that the Bank expects rates to stay at 0.5 per cent for some time, and that the door remained open for additional asset-buying increases.