Bank of England divided on forward guidance, outlook for asset purchases

Wed Aug 14, 2013 4:34am EDT
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LONDON (Reuters) - Bank of England policymakers proved to be unexpectedly split on new governor Mark Carney's long-run commitment to keep interest rates low earlier this month, minutes of their August meeting showed on Wednesday.

Martin Weale, an external member of the Monetary Policy Committee, voted against Carney's flagship policy because he feared it could push up medium-term inflation expectations.

The news is likely to reinforce market doubts that the BoE will keep rates low for the three-year time scale that initially appeared likely when Carney unveiled the guidance last week.

Indicating the scale of divisions on the MPC, other policymakers said they saw a "compelling" case to restart bond purchases, but were holding off until they could gauge the impact of forward guidance.

Last week the Bank of England joined a growing bandwagon among central banks to commit to keeping interest rates low for an extended period - in the BoE's case, until unemployment drops to 7 percent, subject to several caveats.

One of these was that the central bank would consider raising interest rates if it judged inflation in 18-24 months was likely to reach 2.5 percent - a timescale that Weale believed was too long.

"(Weale) saw a particularly compelling need to do more to manage the risk that forward guidance could lead to an increase in medium-term inflation expectations, by setting an even shorter time horizon," the minutes said.

The BoE's long-term goal remains to return consumer price inflation to 2 percent, without causing unnecessary volatility in growth. Inflation has exceeded 2 percent since December 2009, and is currently 2.8 percent.

However, Weale said he accepted the principles of forward guidance and that he would form his future judgments based on the framework adopted by the majority.   Continued...

Members of the public walk past the Bank of England in central London June 3, 2008. REUTERS/Alessia Pierdomenico