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Bank of England unites against QE under Carney

Katrina Bishop and Katy Barnato
Wednesday, 17 Jul 2013 | 4:43 AM ET
What message is Mark Carney sending?
Melanie Baker, U.K. economist at Morgan Stanley, comments on the Bank of England's minutes which showed all board members voted against an extension of stimulus, including the new governor, Mark Carney.

The Bank of England's (BoE) monetary policy committee (MPC) voted unanimously against increasing its bond-buying program this month, minutes of new governor Mark Carney's first meeting revealed on Wednesday.

It marked an unexpected change from previous months, when a number of committee members voted in favor of restarting the BoE's £375 billion ($571.6 billion) quantitative easing (QE) program.

"An expansion of the asset purchase program remained one means of injecting stimulus, but the committee would be investigating other options during the month, and it was therefore sensible not to initiate an expansion at this meeting," the policymakers said, according to the minutes.

Melanie Baker, U.K. economist at Morgan Stanley, told CNBC said the unanimous vote was unexpected.

"We were looking for a 7-2 vote so it is certainly a surprise it that sense," she told CNBC. "I'm interested in the overall tone of the minutes… What alternative measures are they looking at?"

Sterling rose by almost 1 percent against the dollar to $1.52, following the release of the minutes, before falling back to $1.5188. The yields on UK 10-year government bonds increased to 2.332 percent on the news, from 2.265 percent on Tuesday.

(Read More: Carney Shows Markets Who's Boss as Sterling Falls)

The vote against further bond purchases comes on the back of a string of positive economic data releases and business surveys which suggest the U.K. economy is recovering quicker than expected.

Baker said: "In terms of more QE, I think it would have to be a very sharp rise in bond yields, accompanied perhaps with a worsening in some of the data. But on the incoming data at least, we have seen some quite strong numbers."

Previously, BoE markets director Paul Fisher and external MPC member David Miles had supported more asset purchases, as did former governor Mervyn King.

Howard Archer, chief U.K. economist at IHS Global Insight, stressed the significance of a unanimous vote at Carney's first meeting.

(Read More: Don't panic! UK recovery is 'firmly entrenched')

"While Mr Carney's job at the July meeting will have been made easier by the latest news on the economy and the fact that major policy decisions are due to be made in August, it does look impressive that he was able to achieve consensus at his first MPC meeting," he said.

Following the meeting on July 4, the BoE released a surprise statement giving forward guidance on future policy, leading to a rally in London stocks and sharp drop in sterling.

"In the United Kingdom, there have been further signs that a recovery is in train, although it remains weak by historical standards and a degree of slack is expected to persist for some time," the statement said.

Both Morgan Stanley's Baker and IHS' Archer said they expected this trend to continue.

"While it currently looks less likely that the Bank of England will loosen monetary policy further, we suspect that Mr. Carney and his MPC colleagues will want to ram home the message that any tightening of monetary policy is a very long way off," Archer said. "To this end, we have little doubt that the Bank of England will adopt a policy of forward guidance on interest rates in August."

On the same day, European Central Bank President Mario Draghi also issued forward guidance on monetary policy for the first time. It marked a new strategy for both central banks, and brings them more in line with the U.S. Federal Reserve, which has issued forward guidance on its asset purchase program.

(Read More: 'Semi-Rude 'Draghi, 'Jump the Gun' Carney Criticized)

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