BoE Inflation Report set to widen debate

THE Bank of England’s quarterly Inflation Report will be scrutinised particularly closely by the market for clues to the future direction of British monetary policy when it is published on Wednesday.

The three-way split among the Monetary Policy Committee (MPC) members has created growing uncertainty about the timing and future direction of changes to interest rates and quantitative easing. There is still a widespread expectation that a further loosening in UK monetary policy is likely, if not imminent.

IHS Global Insight’s Howard Archer expects the Bank of England to raise both its near-term growth and inflation forecasts but to keep its forecasts further out unchanged.

City economists also expect the central bank to leave the door open for further quantitative easing. “I expect the Inflation Report to leave the door open to renewed quantitative easing should growth falter markedly over the coming months,” added Archer.

However, it is unlikely that the Bank will signal that further QE will be introduced in the very near-term, with many predicting February as a likely month. “The MPC is not in a position to signal next week that a QE extension is imminent, simply because it is not,” explains Barclays Capital’s Simon Hayes.

“The November Inflation Report is expected to bear a close resemblance to that in August, perhaps indicating a small bias to loosen but with the main stress being on the heightened uncertainty surrounding the outlook,” Hayes added. The result could be that the next move in monetary policy could be in either direction.

The Inflation Report may also give some clues as to whether one or more of the seven committee members that has sat on the fence until now decided to join either Andrew Sentance or Adam Posen this month.