Bank of England split over monetary policy
Seven out of the nine MPC members voted to increase the radical quantitative easing scheme by £25 billion - taking the total amount of new money created from £175 billion to £200 billion.
However, another member, David Miles, called for a £40 billion rise to “provide greater insurance to the downside risks to growth and inflation” while Spencer Dale, the central bank’s chief economist, believed there should be no increase at all.
Dale claimed that more money pumped into the economy might fuel "unwarranted increases in some asset prices that could prove costly to rectify”.
Despite the division over quantitative easing, all the members agreed to keep the interest rate at a record low of 0.5%.
Economists believe the MPC could take further monetary policy action in the months ahead. Howard Archer, chief UK economist at IHS Global Insight, says: “The door is clearly not shut on further quantitative easing, particularly given the major uncertainties and risks surrounding both the growth and inflation outlooks.
“Nevertheless, with the economy almost certainly returning to growth in the fourth quarter and inflation now moving back up and set to spike up markedly over the next few months, we suspect that November marked the final extension to the quantitative easing programme unless the economy suffers a major relapse in 2010.”
Jonathan Loynes, chief European economist at Capital Economics, adds: “The overall tone of the minutes is still fairly dovish, with the discussion identifying a number of factors - including “a large fiscal consolidation” - which will act as a restraint on domestic demand.”
The MPC has next agreed to review the quantitative easing programme in February alongside the next Inflation Report.
For the first time in an MPC meeting, members also openly discussed the merits of cutting the interest rate on bank deposits, which they said “might be a useful tool in some circumstances, and therefore should be available in future”.
Other figures show the headline rate of inflation rose to 1.5% in October from 1.1% the previous month.
Lower interest rates encourage people to spend, not save. But when interest rates can go no lower and there is a sharp drop in consumer and business spending, a central bank’s only option to stimulate demand is to pump money into the economy directly. This is quantitative easing. The Bank of England purchases assets (usually government bonds, or gilts) from private sector businesses such as insurance companies, banks and pension funds financed by new money the Bank creates electronically (it doesn’t physically print the banknotes). The sellers use the money to switch into other assets, such as shares or corporate bonds or else use it to lend to consumers and businesses, which pushes up demand and stimulates the economy.
Monetary Policy Committee
A committee designated by the Bank of England to regulate interest rates for the UK. The MPC attempts to keep the economy stable, and maintain the inflation target set by the government and aims to set rates with a view to keeping inflation at a certain level, and avoiding deflation. The MPC meets on the first Thursday of each month and discusses a variety of economics issues and constitutes nine members: the governor, the two deputy governors, the Bank’s chief economist, the executive director for markets and four external members appointed directly by the Chancellor.
An increase in the general level of prices that persists over a period of time. The inflation rate is a measure of the average change over a period, usually 12 months. If inflation is up 4%, this means the price of products and services is 4% higher than a year earlier, requiring we spend and extra 4% to buy the same things we bought 12 months ago and that any savings and investments must generate 4% (after any taxes) to keep pace with inflation. Since 2003, the Bank of England has used the consumer prices index (CPI) as its official measure of inflation (see also retail prices index).