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UPDATE 1-BoE voted 9-0 to keep rates, QE steady in Dec

Published 12/23/2009, 04:53 AM
Updated 12/23/2009, 04:57 AM

(Updates with reaction)

By Sumeet Desai and Matt Falloon

LONDON, Dec 23 (Reuters) - All nine members of the Bank of England's Monetary Policy Committee voted to keep interest rates at a record low of 0.5 percent and maintain the 200 billion pound asset buying programme in December, as expected.

Minutes of the Dec. 9-10 meeting, published on Wednesday, showed policymakers felt little had changed since November when they expanded quantitative easing by 25 billion pounds -- cash pumped into the economy by buying assets, mostly gilts.

The November decision, however, had been split. Chief Economist Spencer Dale had favoured no QE expansion while external member David Miles wanted a 40 billion pound increase.

The December minutes said those who had sought a different outcome in November still thought "a slightly different scale of asset purchases could still be justified".

"But the lack of significant news on the month meant that the case for deviating from the programme of asset purchases announced in November was outweighed by the benefits of completing it as planned," the minutes said.

Sterling fell slightly after the publication of the vote.

On current plans, the QE programme is scheduled to be completed before the BoE publishes its next inflation forecasts in February.

Most analysts expect the scheme to be frozen at that month's meeting and for it to be eventually wound down as the economy recovers.

"It's (the minutes) still consistent with our view that they will finish QE at the end of January and won't do any more," said George Buckley, chief UK economist at Deutsche Bank.

Britain has been in recession for at least 18 months, the longest period of contraction since World War Two, but is showing signs of recovery. Policymakers expect growth to return in the fourth quarter of this year.

The MPC noted in the minutes that it was difficult to identify with any certainty whether the economy had turned and said there had been both positive and negative developments.

"There were exceptional uncertainties over the outlook for inflation and activity growth which would only be resolved over time," the minutes said.

"These included the willingness and ability of banks to lend to the private sector, the extent to which households would increase saving in response to weakened balance sheets and employment uncertainty, and the size, speed and nature of the fiscal consolidation."

Positive developments over the month included an upward revision to Q3 GDP figures, better than expected labour market data and higher business capital market issuance.

On the downside, money growth had been disappointing and the narrowing of the spread between gilt yields and overnight swap rates -- which the MPC had viewed as a positive response to QE -- had been partly reversed.

"The reasons for that were unclear, however, and it remained likely that the full impact of the asset purchase programme on the economy would be felt only with a lag," the minutes said. (Editing by Stephen Nisbet)

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