MPC to hold rates and QE

POLICYMAKERS are this week expected to err on the side of caution at the monthly meeting of the Bank of England's Monetary Policy Committee (MPC), after they warned last month that it would be impossible to identify with confidence the turning point in the economic cycle.

The MPC, led by Bank governor Mervyn King, is expected to hold interest rates at the record low of 0.5 per cent for the eleventh month in a row at its decision on Thursday. It is also likely to vote to maintain the quantitative easing (QE) asset purchase programme at £200bn.

Howard Archer, chief UK and European economist at IHS Global Insight, expects the MPC to remain reluctant to further extend QE and to keep interest rates down until at least late this year.

"Furthermore, the eventual increases in interest rates are likely to be limited to counter the restrictive impact of the tight fiscal policy that will increasingly have to be enacted from 2011/12 to rein in the bloated public finances," he said.

Minutes from the MPC's December meeting, at which both elements of monetary policy were left unchanged following a £25bn extension to QE in November, showed the committee was keen to hedge its bets to combat ongoing "exceptional uncertainties" over the outlook for inflation and activity growth.

Though the MPC expects a shortterm spike in the inflation rate, it predicts price growth will ease later in 2010 and will remain muted due to substantial spare capacity in the economy. The Bank has also expressed concern at the ongoing reluctance of banks to lend to the private sector, the willingness of households to increase savings and uncertainties over employment.