Bank of England policymakers papered over August's split on the appropriate scale of quantitative easing this month, after Governor Mervyn King held back on pressing for a bigger expansion to the scheme.
Minutes of the BoE's Sept. 9-10 Monetary Policy Committee meeting showed King and external MPC member David Miles voted with the rest of their colleagues to keep the total amount of quantitiative easing at the 175 billion pounds agreed in August.
"For those members who had preferred a larger stimulus at the August meeting, a larger asset purchase programme could still be justified," the minutes said.
"But in the absence of significant news about the medium term the case for adjusting the policy now was outweighed by the benefits of following through with the programme of asset purchases announced in August."
New MPC member Adam Posen — who replaced Timothy Besley, the other supporter of 200 billion pounds in QE — also voted in favour of sticking with the 175 billion plan, leading to a 9-0 vote in favour of both it and keeping rates at 0.5 percent.
King, Miles and Besley had wanted to expand the programme to 200 billion pounds in August, arguing that the risk of doing too little to prop the economy outweighed that of doing too much.
The pound rose nearly a whole cent against the dollar and short sterling interest rate futures fell as investors seized on policymakers' assessment that conditions seemed to have improved and there was no discussion of a potential cut to the rate the BoE pays on commercial banks' deposits.
Figures published separately on Wednesday showed bank mortgage approvals jumped 81 percent from the very low base set in August last year, while the Confederation of British Industry said Britain had probably now emerged from recession.
But analysts said a further expansion of the asset purchase scheme could still be on the cards, as policymakers remained concerned about the sustainability of any recovery and reckoned the amount of slack in the economy would keep inflation in check.
"The minutes note the recent improvements in the economic and financial data, but still leave the door open to further policy loosening," said Vicky Redwood of Capital Economics.
In a speech on Wednesday BoE policymaker Kate Barker said monetary policy would need to continue to support confidence and bank lending and borrowing over the coming quarters and that the inflation outlook remained benign.
"Even if the UK economy starts to grow again in the latter part of this year it may be several quarters before growth is strong enough to reduce the present significant extent of excess capacity," she said.
DEPOSIT RATE SILENCE
There was some disappointment that the minutes gave no indication that policymakers had discussed cutting the interest it pays on commercial banks' reserves with the BoE — an idea discussed by King only last week.
"That could be because 1. this is an internal BoE decision and not one for the entire committee or 2. staff is still at a very early stage in the thinking process," said Amit Kara, economist at UBS.
"There is little doubt though that the BoE is examining this option," he added.
Policymakers said the near-term downside risks to growth had lessened over the month and there was a possibility that the recovery in asset prices and confidence could mark the start of a "virtuous upward spiral" for the economy.
Equity markets have risen to 12-month highs and house prices seem to be levelling off after a 2-year slide.
The economic news flow has also been largely positive in recent weeks and the MPC noted that stronger construction and industrial output data could lead to an upward revision to Q2 GDP.
However, it cautioned that past financial crises had not been resolved quickly and that there could be "false dawns".
"High levels of public debt internationally and the persistence of global imbalances remained downside risks to the sustainability of the recovery," the minutes said.
And while inflation was likely to be higher in the short term than MPC members had thought a month ago, that did not alter the medium-term inflation outlook.
"Even if GDP had turned positive in Q3, it was unlikely to have reached the point where the level of spare capacity was shrinking. Unemployment continued to rise and was likely to continue increasing for some time," the minutes said.
Policymakers felt that rising asset prices and the weaker pound — as well as lower gilt yields, market interest rate expectations and interbank lending rates — would help support spending levels in due course.
"On balance we still expect a 25 billion pound increase as part of a phased easing in the QE programme," Kara of UBS said. "The committee in our view believes the risks to policy making are very much asymmetric and will therefore remain in a 'give growth a chance' mode."
