BOE minutes admit inflation leeway in QE consideration

The Bank of England's (BOE) minutes from its latest monetary policy meeting two weeks earlier show that the central bank remains split over whether to increase its asset purchase programme.

Governor Mervyn King failed to garner more support for a £25bn increase in bond purchases to £400bn. The vote was again split six to three. All nine voting members voted against an interest rate increase.

Earlier this year, there had been heightened expectations of an increase to the central bank's stimulus package following remarks by several members and an inflation report that suggested high prices would be temporarily overlooked. However, there were also concerns over rising inflation expectations and incompliance with the bank's price stability mandate. Nonetheless, economists still expect an increase to asset purchases later this year.

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The minutes show that the BOE remains open to increasing asset purchases.

The minutes also cover the change to the BOE's remit in March, which several market players consider to allow greater leeway for inflation in order to consider economic growth.

On the other hand, analysts at Barclays Research interpret the remit as "an exercise that clarified points of political ambiguity but did not imply any change in the policy stance". Following this argument, the minutes acknowledged that it was setting policy "in broadly the same way that it had done since its formation".

There were several references to the new remit and the reaffirmation that "monetary policy should be set to meet the 2.0% inflation target but in a way that avoided undesirable volatility in output".

"The new remit also confirmed that the Committee should continue to look through temporary, even if protracted, periods of above-target inflation where it judged that cost and price pressures were consistent with inflation returning to the target in the medium term," the minutes read.

The BOE continues to expect a pick-up in inflation to around three per cent in the middle of the year, pointing to tax changes in the new budget and lower oil prices as offsets to recent upside inflation news.

All-in-all, the minutes still set the basis for increasing asset purchases.

"In line with its remit and to avoid undesirable volatility in output, the Committee had previously judged that it was appropriate to look through the impact of these prices on inflation provided that indicators of cost and price pressures were consistent with inflation returning to the target in the medium term."