Bleak BoE outlook pushes gold to record

London - Gold priced in sterling hit a new record high just below £960 an ounce on Wednesday after the minutes of the Bank of England's (BoE's) most recent interest rate meeting showed policymakers believed the economic outlook had weakened, undermining the pound.

Gold in sterling rose by as much as 0.5% on the day to a high of £957.69/oz, a new all-time peak, bringing its gains for the year to 5.2%, compared with a 9% gain in the dollar price of gold .

The BoE's minutes showed members of the rate-setting committee judged the outlook had weakened and some members raised the possibility of future quantitative easing, prompting a decline in the pound against the euro and the dollar and boosting gilt futures.

Two members of the nine-man Monetary Policy Committee (MPC) - chief economist Spencer Dale and external member Martin Weale - still backed an interest rate rise to tackle high inflation, but the overall balance shifted in a dovish direction.

BoE officials observed a run of weak activity indicators at home and abroad in the runup to their June 8-9 meeting, while British consumer demand is stagnant in the face of hefty public spending cuts to slash the country’s huge budget deficit.

“For some of these members, it was possible that further asset purchases might become warranted if the downside risks to medium-term inflation materialised,” the BoE said in minutes of the meeting published on Wednesday.

New MPC member and former Goldman Sachs economist Ben Broadbent voted with the majority to keep rates at a record low 0.5%, rather than follow the lead of his predecessor, arch-hawk Andrew Sentance.

And most MPC members judged weak growth was likely to last longer than thought, remaining below average during the middle of the year, particularly if Greece’s fiscal crisis escalated.

Ten-year gilt yields fell to a seven-month low and sterling weakened to session lows against the dollar and euro in response.

"The minutes of June’s MPC meeting suggested that the committee is moving even further away from a near-term interest rate rise," said Vicky Redwood at Capital Economics. "If the recovery remains as weak as we expect, QE2 could be the story of 2012."

Money markets do not fully price in a rate rise to 0.75% until the middle of 2012 - a sharp move from just three months ago, when a May 2011 rate rise was viewed as a likely option.

Economists, mindful of Britain’s mix of sluggish growth and inflation at a two-and-a-half-year high of 4.5%, on average predicted a rate rise at the tail end of this year in a Reuters poll at the start of the month.

More QE?

The minutes showed most of the MPC believed that weaker-than-expected growth would increasingly weigh on inflation as the effect of short-term upward pressures from higher commodity prices and sales tax dissipated.

"On balance, the committee judged that the downside risks to the prospects for medium-term inflation had increased over the month," the minutes said.

The BoE bought £200bn of financial assets - mostly British government bonds - with newly created money between March 2009 and February 2010, when the economy was in the depths of its worst recession since World War Two.

MPC member Adam Posen maintained his vote for an immediate extra £50bn of quantitative easing. On Tuesday, his MPC colleague Paul Fisher flagged the possibility of more money printing if the central bank’s forecasts began to point towards deflation.

Last week, BoE governor Mervyn King warned that the financial crisis had triggered "seven lean years" - reinforcing analysts’ views that he is unlikely to vote for a rate rise soon.

However, some of those voting to keep rates on hold said there remained a substantial upside risk to inflation over the medium term if the current high rate pushes up public inflation expectations - which have so far remained subdued.

Rate rise advocates Dale and Weale accepted that forward-looking data on growth had been weak over the past month, but added that productivity growth had been "abnormally weak", raising the concern that inflation could be generated by smaller wage rises than in the past.