LONDON (MNI) – Many in the markets had expected a unanimous
decision on the stg50 billion boost to asset purchases announced on Feb
9, but in the event the minutes showed the Monetary Policy Committee was
split 7-2, with Adam Posen and David Miles voting for a
larger-than-expected stg75 billion.

The minutes add to the evidence of a three way split on the MPC,
with the more hawkish members seeing a case for no-extension to
quantitative easing and the doves pushing for more than those in the
centre.

The differences between Miles, Posen and the others shouldn’t be
exaggerated – the committee as a whole did not seem to see much daylight
between doing stg50 billion and stg75 billion.

“The Committee considered the arguments for increasing the stock of
asset purchases by stg50 billion or stg75 billion, either of which
would be sufficient to put inflation broadly on track to meet the target
in the medium term on its central projection,” the minutes said.

Posen and Miles, while recognized as doves, had thrown MPC watchers
off the scent. Posen told reporters Friday that the BOE’s latest
inflation forecast, which shows CPI just under target in 2 years time
based on stg50 billion quantitative easing, was “very close” to his own
view and Miles told Reuters ahead of the meeting it was “presumptuous”
to presume there would be any more QE at all.

Key reasons for the smaller QE boost the MPC endorsed included more
positive domestic and international data flow as well as the euro area
becoming less of a nightmare than it had appeared in the final months of
2011.

And, as markets had scaled back QE expectations and settled on the
smaller stg50 billion move, there was a worry that doing stg75 billion
risked “sending a signal that the Committee thought the economic
situation was weaker than it was”.

Furthermore, the stg50 billion was by any measure “a material
monetary stimulus” and “it was not clear that a stimulus larger than
that was warranted at the current juncture”.

Some hawks suggested that there was a case for maintaining the
stance of policy, including near-term inflation pressures and the fact
headline inflation was still well above the 2% target.

Certainly upside risks to inflation abound.

The committee noted that metals prices had been on the rise since
mid-December and cited the ongoing geo-political threats to crude
prices.

In addition, there is the whole uncertainty over exceptionally weak
productivity and corporate profit margins.

“The weakness of productivity growth had been a factor in the
relatively low level of businesses’ margins: the possibility that they
might seek to restore margins to more normal levels by raising prices
sharply represented an upside risk to inflation,” the minutes said.

Solid enough qualms to make one pause, yet it was not enough to
make those of a hawkish tendency actually vote to stay put.

For their part, the doves were driven in part by the fear
protracted weak growth risked undermining the long-run trend growth of
the economy.

“There was a risk of a prolonged period of depressed demand
causing inflation to fall materially below target in the medium
term…In addition, persistently weak growth might impair the future
supply capacity of the economy through hysteretic effects”.

In the wake of the Inflation Report it had seemed that QE was on
hold, a view reinforced by BOE Deputy Governor Charles Bean’s comments
at the subsequent press conference that the central forecast, the ‘thick
red line’, showed inflation on track to hit target.

“…By the end of the forecast period, the risks of being above or
below the target are roughly 50-50. So in terms of – is the thick red
line at the target in the medium term? – the answer is yes.”

Bean is seen as a centre ground pragmatist – so his big picture
view that stg50bn more QE puts inflation back on target reinforced the
impression that there would be no further QE so long as the data do not
deteriorate further and the Eurozone maintains its new found stability.

The presence of two members voting for stg75 billion QE shouldn’t
seriously alter that calculation, particularly given hawkish concerns
among other members as well as the benign trends in the data and in
the Eurozone.

One substantial difference between upcoming MPC meetings and the
February one is that the MPC started the latter from the perspective
set out in the November Inflation Report – that inflation was set to
clearly undershoot target and that more QE was needed to meet it.

The February Inflation Report, which shows CPI rising to 1.9% three
years’ ahead with growth and inflation risks balanced, does not set such
a high hurdle for those committee members inclined to back unchanged
policy.

The minutes, nevertheless, show a committee which is less
predictable than thought and more QE is now less easy to rule out. The
financial markets certainly drew that message – with sterling seeing a
sharp and sustained weakening in the hours following the release of the
minutes. Gilts also surged on the enhanced prospects for more BOE
buying.

–London newsroom: 4420 7862 7492; email: dthomas@marketnews.com

[TOPICS: M$$BE$]