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Bank to hold interest rates and QE steady

NO CHANGE was the preferred course of action for CityA.M.’s shadow Monetary Policy Committee (MPC) this month as a majority of members voted for both interest rates and the current level of quantitative easing (QE) to be kept on hold.

Seven members said the Bank of England’s MPC should wait to make any further changes to the current 0.5 per cent interest rate and £200bn asset purchase programme until its quarterly Inflation Report is released ahead of February’s meeting.

But two – Henderson’s Simon Ward and CityA.M. editor Allister Heath – voted for QE to be suspended immediately, citing the recent slew of improved economic data as a reason to withdraw emergency policy measures earlier than planned.

This week, official figures showed that the money supply rose by 0.9 per cent in November, more rapidly than expected, while the services sector purchasing managers index (PMI) pushed into growth territory and the manufacturing PMI expanded at its fastest rate in over two years.

However, some members of the shadow MPC did not rule out a further extension of QE next month despite signs of a nascent economic revival.

The Bank, which is due to announce this month’s policy decision today at midday, is widely expected to err on the side of caution and hold policy until February, when the current QE programme runs out.

Policymakers are still concerned about ongoing uncertainties over the outlook for inflation and activity growth. Though the MPC expects a short-term spike in the inflation rate, it predicts price growth will ease later in 2010 and will remain muted due to spare capacity in the economy.

It also remains cautious over the reluctance of banks to lend to the private sector, unemployment troubles, and the increasing household savings ratio.