BoE divided on above-target inflation

Bank of England governor Mark Carney failed to unite policy makers on implementing forward guidance as Martin Weale favoured a tougher stance on above-target inflation.

The Monetary Policy Committee voted 8-1, according to the minutes of its August 1st meeting. While Mr Weale supported the adoption of guidance, he voted against it because of disagreement with an inflation clause.

Under the plan, the MPC plans to keep its benchmark interest rate at 0.5 per cent as long as unemployment remains above 7 per cent. Data today showed it was at 7.8 per cent in the second quarter.

Mr Carney, who joined the BoE last month, introduced the new policy to quell investor bets on higher interest rates that he said were not warranted by the economic outlook. The plan is subject to caveats, including a “knockout” if inflation is seen more than half a percentage point above the BoE’s 2 per cent target in 18-24 months ahead.

Mr Weale wanted a shorter period. He voted against “in order to register his preference for a time horizon for the first inflation knockout that was shorter than proposed”, the minutes said. “That would make clear that the forward guidance was fully compatible with the committee’s commitment” to the inflation goal.

The minutes added that Mr Weale intends “to form his future judgments about the application of guidance and the knockout criteria in line with the framework adopted by the committee”.

“It suggests to me that the eight is a fragile eight and others were nervous but felt they had to go along with Carney,” said Richard Barwell, an economist at Royal Bank of Scotland Group Plc in London. “On this critical issue he wasn’t able to forge a consensus.”

The labour-market report today showed that jobless claims fell for a ninth straight month in July, declining 29,200 to 1.44 million. That took the claimant-count rate to 4.3 per cent, the lowest since February 2009. Economists had forecast a decline of 15,000, based on the median of 29 estimates.

The broader three-month rate, which is now in the spotlight as the BOE’s threshold on guidance, was in line with the median of 30 forecasts in a Bloomberg News survey. The BE sees that measure not falling to 7 per cent until at least the fourth quarter of 2016.

The split among the BOE’s policy makers may undermine the guidance policy, with investors already sceptical of its potential effectiveness. The minutes “will hardly help to reassure the markets about how firm the MPC’s commitment is”, said Vicky Redwood, chief UK economist at Capital Economics Ltd in London. “The MPC may have to take further action to head off what it has termed the ‘unwarranted’ rise in market rate expectations.”

The pound rose against the dollar, climbing 0.1 per cent to $1.5463 as of 10.24am London time. The 10-year gilt yield was little changed at 2.60 per cent, having earlier risen to 2.64 per cent, the highest since October 2011. At the meeting on August 1st, the MPC voted unanimously to keep its quantitative-easing program at £375 billion and its benchmark interest rate at a record-low 0.5 per cent. A minority said the case for more QE was “compelling”, though they said there was “merit in first supporting” guidance and waiting to assess its impact.

For those in favour of no more bond purchases, they said the onus on monetary policy “was to reinforce the recovery by ensuring that stimulus was not withdrawn prematurely”. They said they didn’t rule out more QE if needed. (Bloomberg)