The Bank of England's Monetary Policy Committee was unanimous in agreeing to expand its stimulus policy, called quantitative easing, but is unsure how effective the injection of billions of pounds is in boosting the economy, documents disclosed today revealed.
The bank announced on May 7 that it would increase its spending by 50 billion pounds ($77.6 billion) to 125 billion pounds. It also extended the program, which was due to expire at the end of this month, for an additional three months.
The U.S.
Federal Reserve Board and the Bank of England have both embarked on a policy of expanding the money supply by buying securities from banks, known as quantitative easing.
"The risks of stimulating demand too little at the current time seemed greater than the risks of stimulating it too much," the minutes of their May 7 meeting said.
"If the recovery faltered, then policy makers might find that their ability to stimulate demand in the face of receding confidence would be impaired."
Analysts said the minutes suggested that the Bank may soon move past the 150 billion pounds total initially authorized by the Treasury.
"The minutes clearly support the message from the Inflation Report that even the huge amounts of QE already in the pipeline might not be enough to get the economy back on track," said Vicky Redwood, economist at Capital Economics.
The minutes in fact noted some uncertainty about the impact of the policy so far.
"There was a substantial degree of monetary stimulus already in train and, given the uncertain nature of the transmission mechanism, there was a risk that the committee would not be able to identify early enough when it should be withdrawn," the minutes said.
Because of uncertainty about the speed of recovery and with inflation expected to drop below the official 2 percent target, the committee felt more stimulus "was probably needed to bring inflation back to target in the medium term."
Britain's Treasury chief Alistair Darling said in an interview published Wednesday that he still believes the national economy will begin to recover by the end of the year, an optimistic view not shared by the Bank of England and the International Monetary Fund.
Darling predicted the upturn when he laid out the government's budget a month ago and stood by his upbeat forecast in an interview with The Times newspaper published Wednesday.
"None of the figures I have seen since would change the projections that I have made," he was quoted as saying.
A survey published Wednesday by the Confederation of British Industry in fact supported views that the gloom among manufacturers was bottoming out. Seventeen percent of 575 firms surveyed expected their output to increase in the next three months, while 34 percent expected a decrease.
The difference of 17 points was the best since September, before the collapse of Lehman Brothers, the CBI said.
"After scaling back production very sharply at the beginning of the year, manufacturers can see a glimmer at the end of the tunnel," said Ian McCafferty, the CBI's chief economic adviser.
"They still expect manufacturing activity to fall, but at a much slower rate over the next few months."
The British economy shrank by 1.9 percent in the first quarter, the biggest drop in 30 years.
Darling has forecast that GDP will fall by 3.5 percent for the full year, while the IMF has predicted a 4.1 percent drop.
Darling said he expected the flow of credit from banks to increase. The government has extracted agreements from nationalized mortgage lender Northern Rock and part-nationalized Royal Bank of Scotland and Lloyds Banking Group to make more credit available.
"What I expect is that over the course of this year you will see a gradual improvement, but we have still got to be vigilant," he said.
He was cautious about when the government might try to sell its stakes in those banks.
"I am determined that we get the best possible deal for the taxpayer, so I am in no hurry here," Darling said.
