Price of oil and wage fears keep the QE policy steady

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CONCERNS about a sharp spike in oil prices and wage increases prompted the Bank of England to maintain its programme of asset purchases and keep interest rates at their record low.

Minutes from the BoE’s March Monetary Policy Committee meeting showed members voted seven to two to keep quantitative easing (QE) steady at £325bn.

Adam Posen and David Miles unsuccessfully voted for a £25bn increase to £350bn to reduce the risk that “persistently weak growth” would damage future supply capacity.

The BoE is trying to boost the economy through its programme of buying government debt, in the hope that this money bleeds through to the real economy.

It is desperate to avoid Britain becoming trapped in a low-growth or even deflationary spiral, where companies are unwilling to invest and households wary of spending. Fourth quarter GDP fell 0.2 per cent in 2011, according to revised figures from the Office for National Statistics.

However, the BoE believes “moderate underlying growth” is now likely.

“On the downside, there were significant risks to economic activity that might result in inflation falling materially below the target in the medium term,” said the BoE, which has a two per cent inflation target. “While it appeared more certain that underlying growth was likely to pick up in the United Kingdom in the near term, many of the risks to the outlook were still present.”

It said there has been a “significant improvement in market sentiment” since the European Central Bank’s discounted debt offer. The ECB’s Long Term Refinancing Operation (LTRO) launched in December with a secondary round in February, and banks vacuumed up more than one trillion euros in cheap funding.

But the BoE also noted the cost of raising retail and wholesale deposits for UK lenders has been high since the financial markets were battered by the European sovereign debt crisis in the second half of 2011.

“This was continuing to feed through into increases in the cost of credit for some borrowers,” it said, noting some banks have hiked their standard variable rate (SVR).

The BoE also noted a recent pick-up in the housing market, which saw a 30 per cent year-on-year rise in mortgage approvals in January.

The Bank said while this may have been boosted by first-time buyers rushing to complete before the end of the stamp duty holiday, “there was also evidence of strength in demand from cash buyers and buy-to-let investors”.

“That suggested some of the pick-up in housing market activity might be sustained,” said policymakers. Surging crude oil prices, driven in part by a European embargo on Iranian oil, posed a “clear risk”, said the Bank.

If oil prices continue to rise more than its current forecast, this would slow the global and domestic recovery, the BoE said.

It also raised concerns about signs of an “upward drift” in pay deals, which could put pressure on labour costs.

All nine MPC members voted to keep the bank rate at 0.5 per cent, where it has been stuck for three years.

IHS Global Insight economist Howard Archer said the minutes suggest the MPC is in “no hurry to do any more quantitative easing if at all”.

He added: “We maintain the view interest rates will not rise until at least late-2013 and could very well stay put at 0.5 per cent until 2014.

“Interest rates are clearly not going to be raised for some considerable time to come.”