BOE Cites Pound as Rebalancing Obstacle in 8-1 Vote

(Corrects quote to say appreciation instead of depreciation in seventh paragraph.)

Jan. 23 (Bloomberg) -- Bank of England policy makers said the pound’s level may prove an obstacle to rebalancing the economy and David Miles cited the currency as he repeated his call for an expansion of stimulus.

The Monetary Policy Committee voted 8-1 to keep their bond- purchase plan unchanged at 375 billion pounds ($594 billion), according to minutes of the Jan. 10 decision published in London today. Members diverged on the risks to the economy, with some saying there was scope for wages to pick up while others noting that the economy could grow faster without generating inflation.

“Substantial headwinds to recovery remained, including the drag to activity from fiscal consolidation, a further squeeze in household real incomes, and the deterioration in U.K. competitiveness over the past couple of years,” the minutes said. “The sterling real exchange rate might be above the level compatible with the necessary rebalancing of the economy.”

The Bank of England halted bond purchases in November and is relying on its so-called Funding for Lending Scheme to aid the recovery. Bank of England Governor Mervyn King said yesterday that credit conditions have improved, and “should improve further as the impact of the FLS kicks in.”

“We could provide even more monetary stimulus through further asset purchases,” King said. “We will continue to assess the benefits and costs of further reductions in overnight interest rates. Be in no doubt that we are ready to provide more stimulus if it is needed.”

Miles’s View

Miles said that there was enough slack in the economy to allow policy makers to stoke growth without generating inflation, and that there was a “strong” case to do so. He voted to increase bond purchases by 25 billion pounds, repeating the call from last month.

“An easing of monetary policy, in part by discouraging any further appreciation of sterling, could help the rebalancing and avoid potentially lasting destruction of productive capacity and increases in unemployment,” the minutes showed him as saying.

All nine policy makers voted to keep the benchmark interest rate unchanged at 0.5 percent, the minutes showed.

Along with developments in the U.S. and global growth prospects, “tensions associated with the imbalances within the euro area appear to have eased further,” the minutes said. “These developments had contributed to better financial market sentiment and generally higher asset prices.”

--Editor: Craig Stirling