Bank of England votes against more QE

Bank of England policymakers kept their hands firmly on the brake this month despite broad agreement that the economy remained weak and was likely to worsen slightly into the new year.

According to minutes of its meeting earlier this month, the monetary policy committee voted 8 to 1 against pumping further funds into the economy following a report that inflation is likely to stay above 2% next year.

The vote sent a clear signal that the global situation, the recession across the eurozone and the UK economy will need to deteriorate further before a majority of MPC members agree to boost the central bank'squantitative easing beyond £375bn.

David Miles, the former City economist and external member of the MPC, argued there was enough slack in the economy to allow a boost to output without extra inflation, but his call for an increase in QE to £400bn was voted down.

Vicky Redwood, UK economist at Capital Economics, said the MPC was in "wait and see mode" and was likely to need a strong indication of a downturn before increasing the volume of QE.

"The committee's comments suggest that more QE is not imminent. It noted that risks from the euro area seemed less pressing and that inflation was likely to remain above its target over the next year or so.

"But the MPC also gave the impression that it would not take much to tip the balance back in favour of more purchases. It noted that business surveys were consistent with flat output in the near-term and re-iterated its expectation that inflation would fall back to target in the medium-term," she said.

The MPC has relied on its funding for lending scheme to increase credit in the absence of more QE. The committee said there were early signs of banks accessing the £80bn of cheap credit in the scheme for new mortgages and business loans, but little more than £5bn had been deployed so far.

A rise in the value of the pound was noted by the committee, which voiced concern that attempts to rebalance the economy towards exports was being undermined.

Howard Archer, chief UK economist at IHS Global Insight, said the MPC may decide to increase QE in the new year, if only to drive down the value of the pound relative to other currencies.

The Treasury's decision to repatriate bank funds had also worked against an increase in credit, the committee said.

In November the Bank agreed to return coupon payments on the government bonds it had bought so far under the QE scheme, saying the transfer would be equivalent to more than £35bn worth of monetary easing.

However, in the minutes central bankers said the monetary impact of the transfer would be slightly smaller in the very short term than initially assumed, because it had led to a reduction in the issuance of Treasury bills rather than gilts.

Redwood said: "The government's decision to use the transfer of cash from the QE fund to reduce the issuance of Treasury bills might imply less of a monetary easing than had gilt issuance instead been cut. Indeed, if we are right in expecting the economy to disappoint the MPC's expectations, and eurozone tensions to re-emerge, then more QE is not too far off."

Bank of England director Paul Fisher and chief economist Spencer Dale have both said recently that they are concerned about higher than expected inflation.