–Inflation Concerns May Well Deter Some MPC From Backing Near Term QE
–Minutes Pave Way For More QE, But Timing Uncertain

LONDON (MNI), Sep 21 – The minutes of the September Bank of England
Monetary Policy Committee meeting and subsequent comments by Chief
Economist Spencer Dale suggest while more quantitative easing is likely,
MPC members are likely to split in coming months over the timing.

The minutes reported that among the majority who voted for no
extension of QE, there were differences of opinion. Some were prepared
to fire the starting gun if things were as bad this month as last while
concerns expressed over sanctioning more stimulus at a time when
inflation was already well above target and set to rise further.

The minutes said that for most members the decision on whether to
relaunch QE was “finely balanced since the weakness and stresses of the
past month had significantly strengthened the case for an immediate
resumption of asset purchases.”

Among the factors weighing against QE2 were the “risks associated
with easing policy during a period of sustained above-target inflation
and there were concerns about how quickly inflation would fall back to
target.”

In a speech, and question and answer session, later Wednesday Dale,
who was voting for a rate hike as recently as July, made clear he was
one of those troubled by the idea of further loosening policy before
currently high inflation has even peaked.

“If the economic situation continues to deteriorate, some
additional loosening in monetary policy might be needed. But that
decision will need to be weighed against the backdrop of continuing high
inflation, with inflation set to climb higher over the next few months,”
Dale said.

The major suppliers have pre-announced hikes in gas and electricity
prices and Dale said in his Q and A “I expect inflation to increase
quite significantly over the next couple months, and that’s directly
attributable to the increases in utility prices.”

He added that inflation would “fall back in the beginning of next
year quite materially … once the impact of the VAT rise drops out.”

With headline inflation in August coming in at 4.5%, and expected
by many analysts to peak above 5% later this year, the inflation
backdrop is far from ideal for the BOE to engage in another bout of QE.

Some of the no change camp, however, indicated they were likely to
back more QE if the dire economic developments in recent weeks continued
– the seemingly endless euro crisis, the strains on bank funding and
sharp falls in some asset prices.

“For some members, a continuation of the conditions seen over the
past month would probably be sufficient to justify an expansion of the
asset purchase programme at a subsequent meeting,” the minutes said.

Since the September 7 and 8 meeting, the flow of alarming headline
economic news has continued unabated.

Dale himself referred in his speech to an intensification of
concerns over fiscal positions in the euro area, slowing growth in key
export markets and a lack of confidence in policymakers’ ability to
respond to the challenges all “leading to a pronounced downward spiral.”

Some MPC members will have the ammunition they need to sanction
more QE as early as the October meeting. But with inflation not expected
to ease significantly until early 2012 others may be inclined to wait.

Upshot is the timing of the next QE move is uncertain. Some
analysts who had been predicting QE would be relaunched in the first
quarter of next year before the minutes were released stuck to their
guns after the publication.

On the other hand, analysts who had downplayed the likelihood of
more QE conceded the chances had clearly risen post minutes.

The debate among the eight-member no change camp is nuanced, and
covers tactics and even how other foreign policymakers respond.

Members of no change camp saw “some merit in waiting to see how
developments evolved in the coming weeks, including the actions of
overseas authorities,” the minutes said.

The actions of overseas authorities could cut both ways on policy.
If the euro area authorities, unlikely as it may appear at present,
start to get a grip on the sovereign debt crisis the case for more QE
would ease.

If overseas monetary authorities, however, opt for more stimulus in
light of a deteriorating outlook, then the pressure would be on the MPC
to play its part.

The MPC’s preferred policy easing option is more QE, as it looked
at a raft of other options, including a US Federal Reserve style “twist”
and “low for long” policy and concluded none of these were preferable to
QE.

As things stand, more QE looks likely – with no deep rooted
objections to it evident on the MPC. The questions are all about timing.

–London newsroom: 4420 7862 7491; email: ukeditorial@marketnews.com

[TOPICS: M$$BE$]