Bank of England weighs further money inflation

LONDON -- The Bank of England's rate-setting body was unanimous when it voted to keep its key interest rate at a record low of 0.5 percent and said it would assess whether it needed another 25 billion pounds to pump into the economy next month, minutes to the July 9 meeting showed Wednesday.

The nine-member Monetary Policy Committee (MPC) said it had "not learned much" from developments in the month up to the meeting that would have enabled it to assess whether its program to enlarge the money supply needed to be stepped up and that more reliable data would be available next month.

Under the Asset Purchase Program, the Bank of England can buy up to 150 billion pounds of assets from financial institutions, such as government and corporate bonds, financed by the creation of bank reserves, in effect, by printing new money. The Bank hopes the banks will use the funds they gain to lend to businesses and consumers now, but had only committed to using 125 billion pounds so far.

"There had not been enough clear evidence to suggest that the 125 billion pounds target should be changed at this meeting," the MPC said.

Most economists had expected the Bank of England to signal that it would use up the final 25 billion pounds it was allocated by British finance minister Alistair Darling back in March.

Instead, the nine-member panel noted that it would be purchasing the 125 billion pound current target at "a slower rate over the next month than it had under the program so far" and that purchases would continue up until the next rate-setting meeting in August.

It said August would be an opportune moment for the Bank of England to assess the policy and whether it needs the last 25 billion pound installment authorized by the government, as it also publishes its latest quarterly economic forecasts.

"The Committee would keep the scale of the program under review, and the preparation of the August Inflation Report offered an opportunity to reassess the stock of asset purchases in the light of a fully updated assessment of the outlook for inflation and growth and its next meeting," the MPC said.

The minutes also showed that the MPC appeared broadly more confident about the outlook for the British economy, which contracted by a massive 2.4 percent in the first quarter of 2009 from the previous three month period.

"The surveys suggested that the momentum going into the second half of the year was greater than the Committee had expected in May and the near-term inflation outlook may be a little higher," the MPC said.

However, they said the main factors that had influenced its last set of projections in May were still relevant. While the inventory cycle, the big policy stimulus and the pound's fall should boost activity, it said balance sheet constraints within the banks would continue to limit demand growth.

"Overall, little evidence had emerged since May to change the Committee's views about the broad shape of the prospects for the economy in the medium term, although the downside risks to GDP in the near term had probably diminished," the MPC said.

Analysts said the minutes showed the monetary policy committee noticeably more optimistic about the outlook for the British economy.

"The overall tone of these minutes is of a central bank in 'wait and see' mode, but one where there is a notable improvement in sentiment. The view on activity was less doom-laden," said Daragh Maher, an analyst at Calyon Credit Agricole.