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Bank of England split on QE, worried about sterling

Pedestrians walk past the Bank of England in the City of London February 23, 2013. REUTERS/Neil Hall
Pedestrians walk past the Bank of England in the City of London February 23, 2013. REUTERS/Neil Hall

By David Milliken and Olesya Dmitracova

LONDON (Reuters) - The Bank of England is no closer to providing more support for Britain's stagnant economy with most members of its policy committee worried by the weakness of the pound, minutes of its March meeting showed on Wednesday.

Some analysts said the 6-3 vote against further bond purchases, unchanged from February, meant more action from the bank may depend on finance minister George Osborne giving it more leeway to target growth in Wednesday's budget speech.

For now, the bank's policymakers expressed concern that more bond purchases could lead to an unjustified weakening of the pound - at odds with indications in past weeks that some would welcome a weaker currency to aid the country's exporters.

"Further monetary stimulus ... might also lead to an unwarranted depreciation of sterling if it were misinterpreted as a lack of commitment to maintaining low inflation over the medium term," the minutes said.

Sterling rose more than a cent against the U.S. dollar on the news, and 10-year gilts' yield spread over Bunds widened by 2 basis points, as the minutes showed no increase in support for further bond purchases.

Earlier this month sterling had been down as much as 8 percent against the dollar since the start of the year, in part because of comments by Governor Mervyn King suggesting that a weaker pound would help Britain's economy.

"The headlines seem distinctly less dovish and the warnings about the risks for the pound are interesting," said Ross Walker, an economist at Royal Bank of Scotland.

"Previously they have given very little indication that they were in any way perturbed about a fairly marked depreciation in sterling, which of course serves as a green light to the forex markets to push it lower," he said.

Osborne's budget speech on Wednesday is being watched closely for signs of any tweak in the central bank's inflation-fighting remit.

Britain's economy has been stagnant for the past two years, putting Osborne under pressure to come up with a recipe to deliver growth. His appointee to the central bank, Canadian Mark Carney, has signaled ahead of taking over as governor in July that now was a good time to look at the bank's methods.

STICKY INFLATION

Governor Mervyn King, markets expert Paul Fisher and external member David Miles remained in a favor of a further 25 billion pounds of purchases that would take the total to 400 billion pounds, but could not convince their other colleagues.

Consumer price inflation rose to a nine-month high of 2.8 percent in February. The central bank forecasts it will rise above 3 percent later this year, and will not return to its 2 percent target until early 2016.

Policymakers agreed the economic outlook had changed little since their February meeting, though the inflation outlook was slightly higher, in part due to a further fall in sterling.

The labor market has been a relative bright spot, however, and data on Wednesday showed the lowest number of people claiming jobless benefit since June 2011 and a broader measure of the unemployment rate steady at 7.8 percent.

But lower levels of unemployment than in many other European countries have come at the expense of slow wage growth, with salaries up just 1.2 percent on the year - weakest growth since late 2009.

"The continued rise in employment is obviously good news ... but the dark side of it is weakness in productivity," said Rob Wood of Berenberg Bank. "The UK is producing less with more and that has been holding back the Bank of England from more stimulus."

The Bank of England's 375 billion pounds of government bond purchases to date are equivalent to about a quarter of British gross domestic product, almost double the same measure of the U.S. Federal Reserve's ongoing quantitative easing program.

(Additional reporting by William Schomberg and Peter Griffiths; editing by Patrick Graham)

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