The Monetary Policy Committee said while the arguments for and against cutting the benchmark rate from the current record low of 0.5 percent hadn’t changed since June, they may be reviewed in the coming months, according to the minutes of its July 4-5 meeting. The MPC voted 7-2 to increase quantitative easing by 50 billion pounds ($78 billion) to 375 billion pounds at the meeting.
The Bank of England has joined counterparts around the world in expanding measures to support growth as the threat from the euro-area turmoil increases. The Bank of Japan has opened the door to buying debt with negative returns, and Federal Reserve Chairman Ben S. Bernanke said yesterday the Fed may take further action to boost the recovery.
“Central banks are looking to add to their options for further easing and reevaluate all the tools at their disposal,” said Chris Scicluna, an economist at Daiwa Capital Markets Europe in London. “With the exception of Japan, the outlook has deteriorated markedly across the major economies, and there may be further weakness in the euro area going into the end of the year.”
The pound extended its decline against the dollar after the minutes were published. It fell 0.3 percent to $1.5600 as of 2:02 p.m. in London. Money-market traders added to bets on lower Bank of England interest rates, pricing in a 25 basis-point cut as soon as April, according to so-called Sonia rates.
‘Compelling’
The Bank of England’s decision to expand QE in July came two months after officials stopped expanding stimulus.
Most U.K. central bank officials felt that the case for more stimulus was “compelling and stronger than at the previous meeting,” the minutes said. “There were increasing signs that the threat of a disorderly resolution of the financial tensions in the euro area was affecting growth at home.”
In addition to QE, the Bank of England has started a “Funding for Lending Scheme” to boost credit and recommended that banks be allowed to tap liquidity buffers to ease credit strains. It said in the minutes that the impact of these measures was “potentially significant, but hard to calibrate.”
Rate Assessment
At the July 4-5 meeting, the MPC was unanimous in a decision to leave its benchmark rate unchanged. While it said cutting the rate had “drawbacks” compared with more QE and the arguments for and against such a move were the same as in June, this assessment could change.
“The impact of the FLS and other policy initiatives might, in time, alter the committee’s assessment of the effectiveness of such a rate reduction,” the minutes said. “The committee could review this option again when the impact of the FLS and other policy initiatives was more readily apparent; that was unlikely to be for several months.”
Data today showed U.K. unemployment fell to a nine-month low in the quarter through May as the London Olympics helped to create jobs. The jobless rate based on International Labor Organization methods fell to 8.1 percent from 8.2 percent in the period through April. Jobless-benefit claims rose 6,100 in June. The increase, though larger than the 5,000 median forecast in a Bloomberg News Survey, was inflated by a benefit-rule change that took effect May 21.
BOJ Purchases
Separately today, the Bank of Japan (8301) scrapped a 0.1 percent yield floor for government bond purchases and removed the limit on purchases of securities with maturities of one year or less in its so-called rinban operation.
The central bank is struggling to buy enough bonds to execute a stimulus program to strengthen the economy as Europe’s crisis and a global economic slowdown boost demand for the government’s debt. It tweaked its stimulus program on July 12 without adding extra money and said that it would buy more treasury bills. The overnight rate target stayed at between zero and 0.1 percent, unchanged since October 2010.
The BOJ failed to attract enough bids in its rinban purchases on July 6 for a second time since May, as banks chose to hang on to the bonds rather than take cash. A six-month funding operation also didn’t reach its bid goal for a 14th straight time on July 10.
“It didn’t look good for the BOJ to have a series of failures in their operations given they have been saying they are pursuing powerful monetary easing,” said Mari Iwashita, a bond strategist at SMBC Nikko Securities Inc. in Tokyo. “Negative yields is an indication of their determination.”
China House Prices
Elsewhere in Asia today, China reported that new home prices rose in 25 of 70 major cities in June from May, indicating that economic growth may be supported by a rebound in the real-estate market.
In the U.S., Bernanke will testify before Congress for a second day. Policy makers “are looking for ways to address the weakness in the economy should more action be needed to promote a sustained recovery in the labor market,” he said yesterday.
The Fed’s Beige Book assessment of economic conditions is also due today. The residential property market may be one of the bright spots, with a Commerce Department report likely to show that builders began work on more houses in June than at any time since October 2008, according to a Bloomberg News survey.
At the Bank of England, policy makers Spencer Dale and Ben Broadbent dissented from the majority this month in favor of no change to the bond-purchase target, saying bank-credit measures may offset the need for more stimulus via QE.
The central bank said 2012 growth would be “roughly flat” and it was also “less likely” inflation expectations would become ingrained in the economy. Data yesterday showed U.K. inflation unexpectedly slowed to 2.4 percent in June, moving closer to the central bank’s 2 percent target.
The minutes “suggest a range of future policy possibilities, although all of them in an easier direction,” said David Tinsley, an economist at BNP Paribas in London. In November, the MPC “could decide to boost plain vanilla QE by another 50 billion pounds. But if there are signs the funding for lending scheme is gaining some traction they could instead lean more in the direction of a cut in bank rate.”
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