MPC to hold but more QE is possible

QUANTITATIVE easing and interest rates should be kept on hold this month say a majority of City A.M.&rsquo;s shadow monetary policy committee (MPC) ahead of the Bank of England&rsquo;s policy decision due at midday today.<br /><br />A number of members say that we need to give quantitative easing (QE)more time to take effect. But they warn that a further extension to QE should be seriously considered in the coming months, if money growth does not pick up and the recovery remains fragile. Given the level of the output gap, they say that the risks of inflation are minimal and deflation is a much bigger worry.<br /><br />But Citigroup&rsquo;s Michael Saunders said that the priority should be to fix the banking system and get the public finances back on a sustainable track. QE will not do this, he warned.<br /><br />Few in the City expect the Bank of England to extend asset purchases this month. Its decision is likely to be influenced by the string of better data, including a rise in industrial production and growth in its preferred measure of the money supply.<br /><br />Last month the Bank surprised the market by extending the programme by &pound;75bn and three members of the MPC &ndash; governor Mervyn King included &ndash; voted last month to extend QE to &pound;200bn. This, combined with the continued risks of a further dip in the economy, means that another extension could be on the cards. <br /><br />Former MPC member David Blanchflower, writing in the New Statesman, predicted the committee would vote for more QE.<br /><br />&ldquo;My bet is that he King will get his way and the MPC will approve further quantitative easing by November at the very latest. He may even manage to get rates down below 0.5 per cent,&rdquo; he said.<br /><br />Most economists think the MPC will increase QE in November, when the next Inflation Report comes out.