Quantitative easing is losing favour among MPC members

Minutes from the Monetary Policy Committee (MPC) meeting earlier this month showed the BoE increasingly swinging in favour of its credit-boosting Funding for Lending Scheme (FLS) instead.

In a bid to combat stagnant growth, the BoE and Government launched the FLS in August to provide banks and building societies with cheaper funds in return for boosting lending to businesses and households.

The economy is expected to have contracted by about 0.2 per cent in the fourth quarter of 2012, figures from the Office for National Statistics will show on Friday.

The MPC said there was “considerable further scope” for more asset purchases, where it buys Government debt to spur on the economy.

“But there remained uncertainty about their impact on nominal demand, and they might prove less effective in boosting real output when resources needed to be shifted between sectors and while the banking system was constrained,” it said.

It added while it was too soon to assess the impact of the FLS in boosting lending and the economy, “the early signs within the banking sector were encouraging”.

A separate report from the BoE’s network of agents yesterday said the FLS is expected to take a “few more months” to have a meaningful impact. The MPC kept the central bank’s 0.5 per cent base rate and £375bn quantitative easing (QE) programme unchanged at the meeting on January 9 and 10.

One MPC member, David Miles, voted for another £25bn of QE but was overruled by eight votes.

“On balance, most members judged that it was not necessary at this meeting to change either bank rate or the size of the asset purchase programme in order to meet the inflation target in the medium term,” the minutes said.

The MPC cited “growing evidence” credit supply has improved thanks to FLS. “Lower funding costs had started to pass through to lower loan rates,” it said. However, the MPC said it was “difficult to get a sense of the underlying strength of growth” in the UK, citing conflicting business surveys.

“It seems that the majority now believe that further asset purchases will do little to boost demand, which is why Governor (Mervyn) King turned to the need for supply side reforms in his speech last night,” said Yorkshire Bank economist Tom Vosa.