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Bank of England divided on forward guidance, outlook for asset purchases

Members of the public walk past the Bank of England in central London June 3, 2008. REUTERS/Alessia Pierdomenico
Members of the public walk past the Bank of England in central London June 3, 2008. REUTERS/Alessia Pierdomenico

LONDON (Reuters) - Bank of England policymakers proved to be unexpectedly split on new governor Mark Carney's long-run commitment to keep interest rates low earlier this month, minutes of their August meeting showed on Wednesday.

Martin Weale, an external member of the Monetary Policy Committee, voted against Carney's flagship policy because he feared it could push up medium-term inflation expectations.

The news is likely to reinforce market doubts that the BoE will keep rates low for the three-year time scale that initially appeared likely when Carney unveiled the guidance last week.

Indicating the scale of divisions on the MPC, other policymakers said they saw a "compelling" case to restart bond purchases, but were holding off until they could gauge the impact of forward guidance.

Last week the Bank of England joined a growing bandwagon among central banks to commit to keeping interest rates low for an extended period - in the BoE's case, until unemployment drops to 7 percent, subject to several caveats.

One of these was that the central bank would consider raising interest rates if it judged inflation in 18-24 months was likely to reach 2.5 percent - a timescale that Weale believed was too long.

"(Weale) saw a particularly compelling need to do more to manage the risk that forward guidance could lead to an increase in medium-term inflation expectations, by setting an even shorter time horizon," the minutes said.

The BoE's long-term goal remains to return consumer price inflation to 2 percent, without causing unnecessary volatility in growth. Inflation has exceeded 2 percent since December 2009, and is currently 2.8 percent.

However, Weale said he accepted the principles of forward guidance and that he would form his future judgments based on the framework adopted by the majority.

Although several BoE policymakers had expressed skepticism about some forms of guidance on interest rates before Carney's arrival, most economists had expected Carney to be able to build consensus at the Monetary Policy Committee's August meeting.

Last month Carney succeeded in persuading two MPC members - Paul Fisher and David Miles - to drop their long-standing call for more asset purchases, pending a decision on forward guidance.

But August's minutes showed that some unnamed policymakers still thought there was a strong case for more asset purchases, but they would not vote for it until market reaction to forward guidance was clear.

The nine-member MPC voted unanimously in favor of keeping the Bank of England's main interest rate at 0.5 percent and leaving total asset purchases at 375 billion pounds.

Part of the aim of forward guidance is to push down short-term market borrowing costs in Britain's economy.

But even here, the MPC appears to be divided. While most MPC members said that the rise in British short-term market interest rates since May was not warranted by the economic outlook, others thought it might well be. In July's minutes, no division on this matter was apparent.

Unlike in Canada, where Carney headed the central bank before being headhunted by British finance minister George Osborne to succeed former BoE governor Mervyn King, MPC members are not expected to follow the governor's lead.

(Reporting by David Milliken and Belinda Goldsmith)

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