QE is back on Bank’s agenda

Tim Wallace
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LOW confidence, high inflation and continuing fears for the Eurozone are giving the Bank of England’s Monetary Policy Committee (MPC) a headache for Thursday’s interest rate decision.

Last month the MPC’s two most hawkish members, Spencer Dale and Martin Weale, voted to keep rates on hold at 0.5 per cent. That marked a change from their previous position, in which both had called for a tightening of policy.

Economic data have not improved since – inflation remains on track to break the five per cent mark and economic growth in the UK and across the Eurozone looks weaker.

Arch-dove Adam Posen has continued to call for a further £50bn of quantitative easing (QE) in response to weak growth prospects. Indeed, just last week Posen called very directly for further quantitative easing, writing for Reuters, “G7 central banks should purchase more assets if we are to have any hope of our economies catching up.”

The problem for advocates of QE, though, is that rates are already at extreme lows and few economists see a lack of liquidity in the banking sector. Areas like 30 year rates could fall – those yields are higher than in the middle of last century – but 10 year gilts are trading at very low yields.

The UK’s position contrasts with that of the Eurozone, where growth is also weak but inflation, at 2.5 per cent, is not nearly so high. That gives the European Central Bank more room for manoeuvre - it raised rates eariler this year to combat infation, and may now be able to hold or lower them in an effort to boost growth.

“Deteriorating trends in business surveys, weak consumer confidence and a sharp slide in equities [mean] the MPC meeting is likely to have a serious discussion over whether to expand QE further,” says Citi economist Michael Saunders. “We consider it is a much closer call than markets currently assume.”

Along with other economists, Saunders believes the MPC must wait for more data before a firm decision can be made.