MPC forecast to hold back from more QE

UNEXPECTEDLY strong growth in the three months to September and stubbornly high inflation will force the Bank of England’s Monetary Policy Committee (MPC) to hold back from loosening policy further when it meets later this week, according to a majority of City economists.

The news last week that the British economy had expanded at a quarterly rate of 0.8 per cent during the third quarter prompted a number of City economists to revise their outlook for interest rates and quantitative easing (QE). The expansion was twice as fast as the consensus expected.

Many had seen November as the most likely month for the MPC to move on policy because the committee benefits from fresh growth and inflation forecasts, which will be made public in the quarterly Inflation Report on 16 November.

Even Capital Economics, which had been extremely dovish, admitted last week that the strong rise in GDP significantly reduced the chances of additional quantitative easing (QE) being announced at this Thursday’s meeting, barring a big shock the purchasing managers’ indices which are released over the next three days.

Vicky Redwood at Capital Economics still thinks that further asset purchases in early 2011 are likely. Societe Generale’s Brian Hilliard agrees, suggesting February 2011 as a likely month.

But he adds: “If [governor Mervyn] King were to give even the slightest hint that the MPC might soon move to QE2 then we would have to revise our forecast of the timing of the move from February 2010 to December 2010.”

Last month’s three-way split among policy members is expected to maintained, with hawk Andrew Sentance on one side and dove Adam Posen on the other. Sentance had voted to raise rates by 0.25 per cent while Posen was in favour of expanding QE by £50bn to £250bn.