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Divided Bank of England knocks pound, sets stage for Mark Carney

Governor of the Bank of England, Mervyn King.

IAN HODGSON/AP

Mervyn King could be softening up the Bank of England's policy committee for his heir as governor of Britain's central bank, Canada's Mark Carney.

The minutes of a meeting earlier this month of the Bank of England's Monetary Policy Committee, released Wednesday, show Sir Mervyn joined two others in voting for expanding the central bank's asset-purchase program.

Analysts and traders were caught off guard.

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In January, only David Miles favoured further monetary stimulus. The view among economists was that he was again isolated in an 8-to-1 vote for the status quo on Feb. 7.

Instead, Sir Mervyn and Paul Fisher joined Mr. Miles in backing an increase in the Bank of England's bond-purchase program by £25-billion, to a target of £400-billion.

Even though the majority of the Bank of England's policy makers opposed more stimulus, investors sensed a shift at the central bank. Britain's currency plunged to a 15-month low against the euro as traders bet the Bank of England was poised to keep interest rates low, despite inflation that is well in excess of the central bank's target.

"This vote clearly means the hurdle for further QE is lower than we had previously thought," wrote Simon Hayes, an economist at Barclays Capital, referring to the term for quantitative easing, the policy of creating money to buy financial assets.

The pound already was weaker, in part because some investors think Mr. Carney is more comfortable with lower interest rates than are the current leaders of the Bank of England.

At the Bank of Canada, Mr. Carney has spoken favourably of making conditional commitments to leave borrowing costs exceptionally low for an extended period when the benchmark rate is near zero.

The Bank of Canada governor has also expressed a willingness to exceed the central bank's inflation target, and has left its benchmark rate unchanged at 1 per cent for more than two years.

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Sir Mervyn appeared to play down the likelihood of more stimulus last week, telling a press conference that the effectiveness of quantitative easing wanes over time.

The policy committee echoed that view. While agreeing that increased bond purchases likely would cause little inflationary pressure, policy makers said through the minutes that it "seemed possible that further broad-based monetary stimulus would on its own be insufficient to transform the outlook for growth."

But the Bank of England isn't closed to doing more.

The minutes revealed that policy makers discussed measures other than quantitative easing, focusing on measures the central bank could deploy with other British authorities to address "particular frictions or market failures." Some market participants interpret this line of debate as Sir Mervyn's doing.

"With Governor King's term set to expire in June, we believe he will want to hand off the reigns to incoming Governor Mark Carney having done all he can to help the U.K. economy," Adrian Miller, director of fixed income strategy at GMP Securities, said in a note to clients.

"The next several months could be considered King's swan song where his legacy is likely to be finalized."

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Expectations for Mr. Carney in Britain are sky high.

The minutes show it will be difficult for him to force his will on the central bank's policy committee. While the pound's drop suggests traders believe change is coming at the Bank of England, the fact remains that Sir Mervyn failed to persuade the majority of the committee's members to his side.

It was the fourth time Sir Mervyn lost a vote. Mr. Carney never has been in that position because at the Bank of Canada he alone holds the statutory power to set monetary policy.

Nor is it entirely clear that Mr. Carney will want to dramatically alter the Bank of England's path. While he favours "flexible" inflation targeting, Mr. Carney has stated repeatedly that a central bank's first job is containing prices

The Bank of England's latest inflation report last week showed the central bank expects inflation to remain above its target for another three years.

Still, it appears Mr. Carney will be taking over a central bank that is at least open to new ideas. That could help him avoid the indignity of losing his first vote as governor.

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About the Author
Senior fellow at the Centre for International Governance Innovation

Kevin Carmichael is a senior fellow at the Centre for International Governance Innovation, based in Mumbai.Previously, he was Report on Business's correspondent in Washington. He has covered finance and economics for a decade, mostly as a reporter with Bloomberg News in Ottawa and Washington. A native of New Brunswick's Upper St. More

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