As they did in February and March, the U.K.’s monetary policy committee voted 6-3 to keep monetary policy unchanged.
While all policymakers agreed to leave interest rates at a record low of 0.50%, they remained divided on the issue of bond purchases.
Once again, Governor Mervyn King sided with the doves and joined David Miles and Paul Fisher in calling for a 25 billion GBP increase in bond purchases. But the remaining 6 members of the MPC, on the other hand, had their hearts set on keeping the central bank’s asset purchase program at 375 billion GBP.
Despite the continued deadlock, the markets still ended up dumping the pound aggressively. As you can see, sellers took control of GBP/USD after the minutes were released, dragging the pair down well past the 1.5300 handle.
The way I see it, there are two possible reasons behind the selloff – the dovish outlook for the U.K. economy and the release of downbeat employment data.
On its own, the MPC meeting minutes didn’t exactly inspire confidence in the U.K. and the pound. True, the BOE opted not to change its monetary policy, but it wasn’t because policymakers are expecting growth to pick up. On the contrary, the BOE had stated that it expects growth in the first half of 2013 to be muted.
Second, the release of the MPC minutes was at the exact same time that employment stats were made available, and those turned out to be quite disappointing.
While unemployment claims dropped for the fifth consecutive month, the unemployment rate rose from 7.8% to 7.9%, as 70,000 more people lost their jobs over the three-month period ending in February. This brought the total number of unemployed people to 2.56 million.
Meanwhile, we also saw average weekly earnings growth fall from 1.2% to 0.8%, the lowest level we’ve seen in nearly a year.
This is troublesome news, because if people don’t have jobs or are earning less, it puts the U.K. economy in an even bigger hole to climb out of.
Still, despite poor performance from the labor market, it’s clear that the BOE is still a little hesitant to pull out the QE guns.
For one, inflation is still a major roadblock for the British economy. Earlier this week, the U.K. CPI clocked in at 2.8%, which is way above the central bank’s target 2.0%. Furthermore, the BOE is predicting this could climb above 3.0% by the end of the year. Additional bond purchase would only cause inflation to speed up.
Second, policymakers also want to look into the Funding for Lending scheme and see how this could benefit the economy. The latest figures indicate that it hasn’t boosted lending all that much, but the minutes revealed that the central bank is looking to expand the program and promote it even more.
In any case, the stagnant economic performance and the threat of a triple dip recession has many economists believing that the BOE will end up jumpstarting its asset purchase facility by the middle of the year.
With Mervyn King standing firmly on his pro-QE stance, he may merely be setting the tone for incoming Governor Mark Carney, who’s set to take over the top post this coming June. For all we know, Carney will start his reign on the throne with a massive change up to the BOE’s current monetary policy programs.