Economy could be boosted with more cash

19 August 2009

The head of the Bank of England wanted to inject a further £75 billion into the British economy in August, but was outvoted by other members of the Monetary Policy Committee (MPC), it has been revealed.

Earlier this month, the MPC decided to hold the base rate at 0.5% and increase its quantitiative easing scheme (the creation of more money) by £50 billion to £175 billion. However, the minutes of its meeting now show that Mervyn King, governor of the Bank of England, proposed increasing this amount further to £200 billion.

Although fellow MPC members Tim Beasley and David Miles agreed with King's proposal, the other six members voted against him. This is the third time King has been outvoted by the MPC since joining in July 2003.
The news that the MPC was split over the decision to extend quantitative easing is not surprise; however, economists were predicting that any dissenters would have voted for a lower increase in the expansion of the programme. The Treasury originally set a £150 billion ceiling on the amount of money that could be created through quantitative easing, and King was forced to seek permission to extend this to £175 billion.
The three members in favour of even move money being pumped into the scheme argued that any negative consequences of such a move would be "less severe" than the potential costs of acting too "cautiously”. They warned that insufficient extra funds into the scheme would cause inflation to remain below its 2% target for a sustained period of time and might also knock public confidence in economic recovery - thus causing said recovery to falter.
However, the majority of the MPC disagreed. They argued that many of the risks facing the economy had receded and that substantial injections of money into the economy might result in inflation rising rapidly.
All members of the MPC agreed to hold the base rate at 0.5% for a further month.
Analysts now believe that yet more cash could be pumped into the scheme to get the economy back on its feet.
Vicky Redwood, UK economist at Capital Economics, says: “Since the meeting we’ve had some unexpectedly strong inflation figures [inflation is falling at a slower rate than originally expected]. But if, as we expect, that turns out to have been a blip and the economic recovery is weaker than the MPC expects, there is a good chance that the MPC will extend the quantitative easing programme again in November.”
Ian Kernohan, an economist at Royal London Asset Management, adds: “It's clear that the bias on the MPC is to err on the side of risking higher inflation, an outcome they feel they can deal with, in order to avoid the deflation trap, which they would find much harder to tackle. Expect more excitement next year, when they attempt a smooth exit from all this monetary largesse.”

If inflation is to rise substantially, then the MPC might decide to increase the base rate sooner than originally expected.

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