LONDON (MNI), June 26 – The extensive evidence given by four Bank
of England Monetary Policy Committee members to the Treasury Select
Committee Tuesday did not undermine the widespread belief there will be
fresh quantitative easing in July but did suggest new bank funding
initiatives could curb the total amount approved.

MPC members all agreed, in their written and verbal evidence, that
the economic outlook has worsened and there was plenty of gloomy imagery
of storm clouds and darkening skies. Both Chief Economist Spencer Dale
and Ben Broadbent, however, floated the idea that the joint BOE and
Treasury credit easing plan could be at least a partial substitute for
fresh QE.

With four MPC members, including Governor Mervyn King, having voted
for more QE at the June meeting it only needs one more member to join
them to get it approved next month. There will be horse trading,
however, over the amount the MPC will sanction and Broadbent and Dale’s
comments suggest caution over the need for any very large slug.

The joint BOE/Treasury ‘Funding for Lending’ scheme is set to be
launched within a few weeks, according to King. Its central idea is that
the more banks boost their net lending, the cheaper the funding they
will be able to obtain from the central bank.

Dale said he voted for unchanged policy at the June meeting in part
because of the risk that inflation could prove more persistent than
expected.

“I was also of the view that, were the economy to require
additional stimulus, I would like to explore the possibility that some
of that support be provided by measures designed to improve the flow of
bank credit,” Dale said in his written evidence.

Dale argued that improving credit availability to households and
companies could bolster the supply side of the economy, which he has
long worried is weak with the consequence spare capacity may be less
than had been thought.

Broadbent also talked about the BOE’s credit easing initiatives
acting as a substitute, rather than a straight compliment, to more QE.

King only formally told his MPC colleagues at their June 6 and 7
meeting about the planned ‘Funding for Lending’ initiative and the new
liquidity insurance the BOE was offering through the Extended Collateral
Term Repo auctions.

Broadbent cited these new schemes as a reason for hesitating over
voting for more QE in June.

“Having become aware of the possibility of these other policies
that too gave me pause because, to some degree at least, one can regard
them as a substitute, or having similar effects as … quantitative
easing,” Broadbent said.

Taken at face value, these comments would suggest that the credit
easing initiatives will result in the MPC sanctioning less QE that it
otherwise would have done.

The decline in inflation in the latest data and falling commodity
prices have, however, made it easier for the MPC to press the restart
button on QE.

Broadbent, like Dale, was one of those MPC members concerned by
the apparent stickiness of inflation but he taken reassurance from
the recent decline.

“Our own task on the MPC has been complicated by an upward revision
to the near-term forecast for inflation (between the February and May
Inflation Reports) and I have therefore refrained from voting for a
further easing in policy since February,” he said in written evidence.

“That said, I have been reassured that measures of medium-term
inflation expectations in financial markets have, of late, fallen back
slightly. It is also notable that the price of crude oil has fallen back
materially since its peak in early March,” he added.

The forecasts in the BOE’s May Inflation Report now look sure to
slashed again, with King and colleagues highlighting how things have
got worse since then.

King said he was struck by how things had deteriorated in recent
weeks.

“I am pessimistic and I am particularly concerned because I think
we’ve seen for two years now the situation in the euro area get worse,
the problem being pushed down the road and not being gripped,” King
said.

He added that he was also concerned by the worsening picture in
Asia and other emerging markets and “my colleagues in the United States
are more concerned than they were at the start of the year about what’s
happening to the American economy. This is not a comfortable position to
be in.”

In the May Inflation Report the MPC said the risks of inflation
being above or below target were broadly balanced through the forecast
horizon, with the chances of an undershoot slightly greater than an
overshoot.

Any lowering of the MPC central forecast paves the way for the more
hawkish members to come on board for further easing.

Predicting the amount of QE the MPC may sanction in July, however,
is tricky. At the June meeting while three members voted for Stg50
billion, BOE Executive Director Markets Paul Fisher, voted for only
Stg25 billion.

In theory if a couple of those favouring no change in policy in
June were to join Fisher in July, there would be an even split vote on
amounts, with no clear rules on how to settle the difference.

In practice, prior to the vote King would seek to get a consensus –
asking MPC members if they would be prepared to shift one way or
another, with strength of opinion likely to swing the day.

With the MPC’s eyes so firmly glued to developments in the euro
zone, the success or otherwise of this Friday’s EU summit in Brussels
may prove as pivotal as anything else as to whether the BOE sanctions
another substantial tranche of QE in July.

-London newsroom: 4420 7862 7491; email: drobinson@marketnews.com

[TOPICS: M$$BE$]