Mervyn King Outvoted on Quantitative Easing Boost

The governor of the Bank of England, Sir Mervyn King, was blocked from pumping £50bn of electronic money into the economy earlier this month after he was outvoted on the central bank's interest rate setting body.

Minutes of the monetary policy committee meeting reveal a majority voted to keep rates on hold and stick with the current £325bn of quantitative easing (QE) at its June meeting.

King was one of three committee members to vote for an extra £50bn and a fourth said he wanted a more modest £25bn injection of funds.

The narrowness of the decision will heighten expectations of a further boost to QE in July after aanother set of lacklustre economic figures, including a rise in jobless claims last month.

King will have been disappointed by the vote, after arguing that the world economy remains fragile and the prospects for growth limited.

The governor was joined by Adam Posen and David Miles, who have consistently argued for Threadneedle Street to boost its level of bond purchases to ease the pressure on cash-strapped banks. Bank official Paul Fisher voted for an extra £25bn.

A group of hawks led by deputy governors Paul Tucker and Charles Bean said that while the economy needed extra monetary support, a further round of bond purchases could be swallowed up by banks desperate to build up their reserves. Banks need to pass on the benefits of QE by using the cash from selling bonds to the Bank of England to offer loans to small and medium-sized businesses.

The minutes show the hawks expect the Financial Policy Committee, which oversees banking regulation, to take a role by loosening the strict rules on bank reserves to ease credit.

The parlous state of the UK's bank finances remains much of the focus of the MPC, according to the minutes.

They said: "It was possible that the impaired UK banking system, coupled with a heightened perception of risk stemming from the euro area, had been a larger impediment to the recovery of both demand and potential supply capacity than previously thought likely: the weakness of lending, housing market transactions, business investment and productivity growth were all possible symptoms of that."

The committee agreed the downside risks to the economy appeared to have grown.

"The near-term outlook for UK activity had softened, and output appeared to be slowing in the euro area, United States and some emerging economies. Set against that, short and longer-term market interest rates had fallen on the month and this would provide some stimulus. More significantly, however, the risks to UK and global activity from financial distress and political tension within the euro area had intensified again. The likelihood of a disorderly outcome looked to have increased, and that could, if it crystallised, have a significant effect on global demand and the stability of the banking system, including in the United Kingdom."

Committee members Martin Weale, Ben Broadbent and the bank's chief economist, Spencer Dale, joined Bean and Tucker in voting against an increase in QE.

This article was written by Phillip Inman, economics correspondent, for guardian.co.uk on Wednesday 20th June 2012 10.50 Europe/London