City watching MPC for clues on rate hikes

WHILE the outcome of this week&rsquo;s monetary policy meeting is, bar any major shocks, a done deal, there is no doubt that the City will closely watch the Monetary Policy Committee&rsquo;s (MPC) decision on Thursday.<br /><br />After surprising the markets last month with an extension of quantitative easing (QE), the Bank intimated in both the accompanying statement and the subsequently released minutes that it would reassess the programme in November when it will benefit from new inflation figures.<br /><br />But the City will examine the accompanying statement for any indications of a more bullish stance by the gloomy Bank of England and the possibility of interest rates being tightened sooner rather than later. The market has already priced in rate hikes in early 2010 and its belief will only be strengthened by the improvements in data and, finally, an increase in the supply of broad money. However, the continued fragility of Britain&rsquo;s recovery means that most economists see no monetary tightening until the second half of 2010. <br /><br />Citigroup&rsquo;s Michael Saunders cautioned that the pick up in activity and sticky inflation data should not prompt the MPC to hike rates or unwind QE anytime soon, even if they judge that, because of the large output gap, there is little or no risk of a serious inflation overshoot in the medium-term. Suggestions of further divisions within the MPC will also be keenly noted &ndash; in August, three MPC members including governor Mervyn King voted for an extension of QE to &pound;200bn.<br /><br />However, Saunders said: &ldquo;With the economy improving, we doubt the Governor&rsquo;s vote to expand QE to &pound;200bn will gain more support this month than in August. The &pound;175bn programme is scheduled to run to end-October, and if the MPC do need to go above &pound;175bn, they can choose to do so in October or November.&rdquo;