By Norma Cohen and David Oakley
The Bank of England signalled on Wednesday that the UK economy might be even weaker than it had previously believed, sending sterling back to levels not seen since the end of last year.
Minutes from the monetary policy committee?s June meeting showed some members believe the Bank may have to consider more gilts purchases, known as quantitative easing, to stimulate the economy. It was the first time since October that the MPC had discussed QE.
Financial markets reacted sharply. Investors further postponed expectations of a 25 basis point rise in interest rates to July 2012. Sterling fell across the board and dropped to a record low against the Swiss franc. Yields on five-year gilts fell 6 basis points, one of the year?s biggest one-day falls.
Previously, only one external member of the nine-strong MPC, Adam Posen, had called for further gilts purchases to help stimulate domestic demand.
However, the minutes show the balance of concern on the MPC has shifted from high commodities prices and inflation to weak underlying demand, especially from consumers.
The MPC still concedes that consumer price inflation could soon exceed the 5 per cent it predicted in May. The latest CPI reading was 4.5 per cent, well above the MPC?s medium-term target of 2 per cent.
Economists also cautioned that further QE was unlikely in the near term. ?Given the subsequent inflationary performance, an awful lot of bad news will be required before more QE becomes a serious contender,? said Stuart Green at HSBC. Malcolm Barr, economist at JPMorgan, said the minutes suggested the MPC may be taking account of so-called ?tail risks?, which are unlikely to happen but could have devastating effects.
? The Financial Times Limited 2011