QE less likely after Bank’s new outlook

GILT yields shot up after the Bank of England’s inflation report yesterday, with the market moving to price in lower expectations of further quantitative easing (QE).

Yields on ten-year gilts jumped 14 basis points to 3.18 per cent from 3.04 per cent before the report was released and sterling rallied to over $1.60 against the greenback and to over €1.17 against the euro.

In its first inflation report since the government’s comprehensive spending review, the Bank kept its GDP growth projections at the same level as in its August report, saying that it had already factored in the fiscal crunch.

It forecast that growth would reach about 2.2 per cent next year and then rise to three per cent by 2012.

But it pushed back the date by which it said consumer price inflation was likely fall below its two per cent target to 2013, cautioning that “the risk around its most likely path are judged to be skewed to the upside”.

Its probability-weighted fan chart (see right) shows that it expects CPI to peak at about 3.4 per cent halfway through 2010 and then to fall to two per cent a year later.

The combination of bullish growth projections and above-target inflation forecasts convinced City economists that a second round of QE is off the books for now.

Ernst & Young’s Nida Ali said: “Further asset purchases are only likely to occur if there are clear signs that the recovery is relapsing.”

But many also think that the report “left the door open” for QE if growth figures slow, with Capital Economics’ Vicky Redwood claiming it could still come as early as February.

Most economists now expect interest rates to remain at their current 0.5 per cent level until late 2011, after which IHS Global Insight’s Howard Archer said they would rise only gradually.