Pound Sterling took a dive after the minutes of the last meeting of the Bank of England's (BOE) Monetary Policy Committee's (MPC) showed that the central bank was a fair bit more dovish than had been thought.

Thus, the MPC's decision to hold the size of its QE program unchanged at £375bn, after its meetings of the past 6th and 7th of February, was decided upon by a margin of 6 votes in favour to 3 against.

The consensus expectation had been for a tally of 8 votes in favour and 1 against (David Miles). In fact, on this occasion Mr. Miles was joined by no other than the Governor, Sir Mervyn King, and Paul Fisher. The latter is the Bank's Executive Director for Markets.

Quite the opposite, some analysts had thought that Mr. Miles might have changed tack.

The above results seem to significantly heighten the possibility that the MPC may soon carry out another increase in its asset purchase program. Yet in any case it is all too obvious that the 'tone' of the minutes was far more 'dovish' than what was expected.

Not by coincidence, in its latest quarterly inflation report, published after the last 'rate-setting' meeting took place, the central bank revealed that it felt more comfortable with higher inflation rates (saying these would not fall below its 2% target until 2016).

Similarly, today's minutes indicate that "although inflation seemed likely to remain above the 2% target over the next two years, the degree of slack in the economy, and the likely positive response of supply capacity to increased demand, meant that higher output growth would not necessarily lead to any material additional inflationary pressure.

"Further asset purchases, in part by acting to reduce longer-term interest rates and underpinning the value of a broad range of assets, could help the process of rebalancing the economy, and avoid potentially lasting destruction of productive capacity and increases in unemployment."

However, commenting on the announcement economists at Barclays say that: "Governor King's vote was the most surprising. He had appeared - recently - to seek to rein in expectations of more quantitative easing (QE), saying that "generalised monetary stimulus alone ... is not a panacea" and "as time passes, larger and larger doses of stimulus are required".

"It is hard to square these comments with his vote for a modest £25bn QE expansion, although his switch may have had the effect of consolidating the fall in sterling, which dropped another 0.8% in response to today's news."

JP

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