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August 20, 2009

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Division within BOE surprises markets

THE Bank of England surprised markets for the second time this month by revealing yesterday that its rate-setting committee was split on how far it should increase its program to boost the money supply with asset purchases.

Minutes from the nine-member monetary policy committee's meeting earlier this month showed that Governor Mervyn King and two other policy makers wanted to pump even more than the announced extra 50 billion pounds (US$82 billion) into the economy.

With markets expecting a consensus vote, the revelation of a division led to an immediate drop in the British pound and a rally in gilt futures.

"It's yet another surprise for the market, with the giant experiment in UK monetary policy making being anything but boring," said Royal London Asset Management economist Ian Kernohan.

While a majority of six voted in favor of the announced 50 billion pound rise, which took the program to a total of 175 billion pounds, King and the remaining two members of the committee wanted a 75 billion pound increase to 200 billion pounds.

King, Tim Besley - voting at his last monetary policy committee meeting before ending his three-year term - and new member David Miles argued that there was less harm in boosting the money supply by too much than there would be by increasing it by too little.

"Insufficiently stimulatory monetary policy would cause inflation to remain below the target for a sustained period of time, depressing inflation expectations, and might harm public confidence in the recovery causing it to falter," the minutes said, summarizing the position of the trio. "Confidence in the efficacy of monetary policy might also be damaged, limiting policy makers' ability to stimulate the economy in future."

Risks recede

However, the majority of committee members plumped for the more moderate expansion, noting that "some of the most immediate downside risks to the economy seemed to have receded."

Going in to the August 5-6 meeting, policy makers were confronted with a raft of data showing improvements in consumer confidence, retail sales, the housing market and the manufacturing and service sectors - suggesting a recovery is already underway.

The majority members argued that substantial injections of liquidity into the economy "might result in unwarranted increases in some asset prices."


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