GDP surprise keeps MPC on hold for now
THE Bank of England yesterday voted to hold fire on further quantitative easing (QE) and kept interest rates on hold at 0.5 per cent, in a move that was widely expected following the strong GDP data released last week.
Prior to the publication of third-quarter GDP, which showed the economy growing at twice the rate expected by City economists, many had tipped November as a likely month for the Monetary Policy Committee (MPC) to move.
Since it is an Inflation Report month, the Bank benefits from fresh growth and inflation forecasts. These will be made public next Wednesday when the Bank’s Inflation Report is published.
The decision not to follow in the footsteps of the Federal Reserve boosted sterling against a broadly weaker dollar, reaching an intra-day high of $1.6296.
Many analysts still believe that the Bank of England will expand QE further in 2011.
“A simultaneous launch of QE2 on both sides of the Atlantic wasn’t going to happen, but we still think the Bank of England will be forced into taking the plunge in 2011,” said Graeme Leach, chief economist at the Institute of Directors.
ING’s James Knightley said: “The lack of credit availability, fiscal austerity and falling house prices are likely to weigh on activity and we do believe that the Bank will eventually follow the Fed down the route of additional QE.” He adds that this is most likely to happen in the second quarter with £50bn of gilt purchases spread over three months.
The European Central Bank (ECB) also maintained the status quo yesterday, leaving the cost of borrowing at one per cent. In the press conference, ECB president Jean-Claude Trichet said he was confident the Federal Reserve still supports a strong dollar, after it committed to pumping more money into its economy via bond purchases.