BoE split on impact of QE, arguments for more easing

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November 21, 2012 10:49 PM EST

Bank of England policymakers disagreed over the exact impact of their asset purchases and over arguments in favour of more monetary easing, minutes to the BoE's November 7-8 meeting showed on Wednesday.

The BoE's decision not to pump more cash into the fragile economy was expected to have been close and potentially swayed by its agreement to return to the finance ministry some 35 billion pounds of interest paid on gilts it had bought so far.

"Views differed over the exact impact of the MPC's asset purchases... A case could be made for a further easing in monetary conditions," the minutes said, noting that output could be expanded without stoking material additional inflationary pressure among other arguments.

"Different members placed different weights on those arguments."

David Miles was the only Monetary Policy Committee member to have voted for more QE this month, calling for another 25 billion pounds.

When the Treasury deal was announced, Bank Governor Mervyn King said it equated to a modest loosening of monetary policy. The central bank also agreed that future interest payments would go back to the Treasury to pay down debt.

The change could affect whether Chancellor George Osborne meets politically sensitive debt reduction targets. But an initial assessment of this in a half-yearly budget update due on December 5 will be made by the government's budget watchdog, without a final ruling from the statistics office.

"The monetary easing caused by the new APF cash management arrangements implied that the required quantity of asset purchases was smaller than otherwise," the minutes said.

At the Inflation Report press conference last week, King left the door open for another round of bond-buying, saying Britain faced years of meagre economic growth.

But, he said, monetary policy could only go so far in helping the economy adjust to the new post-financial crisis world of debt reduction and weak growth.

Moreover, the latest Bank forecasts showed that inflation is likely to be significantly higher over the next 18 months than expected in August, posing a barrier to further policy stimulus.

Inflation hit a five-month high of 2.7 percent in October after a rise in university fees and food prices.

Britain has not fully recovered the output lost in the wake of the financial crisis, while the euro zone's debt problems, government austerity to reduce the budget deficit and banks' reluctance to lend are all holding back economic growth.

(Reporting by Olesya Dmitracova and Alessandra Prentice)

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