THE Bank of England is this week expected to turn off the stimulus taps and bring its unprecedented £200bn quantitative easing programme to an end when the Monetary Policy Committee (MPC) meets later this week.
The central bank has been injecting money into the UK economy from last March and has so far bought almost £200bn of assets, mainly gilts. But after the last increase to QE back saying that the gilt-buying is likely to end in February, when the Bank will benefit from a fresh set of inflation and growth projections.
But while a majority of economists still forecast the QE programme to be paused this month, recent data has put the cat among the pigeons.
Inflation data for December came in at 2.9 per cent – much stronger than many economists, or indeed the Bank of England, had forecast. This immediately prompted talk of policy tightening.
But then extremely weak GDP growth data for the fourth quarter was released last week. This tipped the balance back towards a continuation of the Bank’s extremely expansionary monetary policy.
Economists are once again split about what the Bank ought to do. Investec’s Philip Shaw thinks that the MPC will most likely be in wait and see mode for a while and will only start to hike rates around mid-year.
This will be in “response to increasing signs that the recovery is becoming self-sustaining and that the major downside risks to activity are disappearing”, he added.
Citigroup’s Michael Saunders also thinks that the MPC is likely to pause this week. This implies that the BoE gilt purchase programme will end, but it does not imply that the MPC will immediately seek to sell its gilts — “although this will, we suspect, start before year-end,” he adds.
But other economists think that interest rates are likely to stay at the current of 0.5 per cent until at least the end of this year. The MPC might prove itself ready to inject further stimulus into the economy, should we experience a double-dip recession.
The next Inflation Report on 10 February will give more clues as to which view the MPC sides with.