–November Minutes Removed Greater Likelihood Of Stimulus Line
–Analysts Predicting Near-Term Policy Change Back Down After Minutes

LONDON (MNI), Nov 17 – The minutes of the Bank of England Monetary
Policy Committee’s November meeting showed the two members calling for a
policy change remained isolated and a line in previous minutes about
some members believing it more likely further stimulus would be needed
was removed.

The minutes, and recent comments from MPC members, support the view
that the most likely path the committee will follow is to prolong its
already lengthy policy pause.

Some analysts who had been predicting near-term monetary tightening
or the relaunching of quantitative easing have pulled the call and the
growing expectation is the MPC will, bar shocks, sit tight in the months
to come.

The September and October MPC minutes both talked about some
committee members believing it was more likely that further stimulus,
effectively a relaunch of quantitative easing, would be needed.

The October minutes said “Some … members felt the likelihood that
further monetary stimulus would become necessary in order to meet the
inflation target in the medium term had increased in recent months.”

The November minutes, released Wednesday, contained no equivalent
sentence.

They showed MPC member Adam Posen remained isolated in backing the
relaunching of quantitative easing and Andrew Sentance isolated in
calling for a hike in Bank Rate.

“Most members felt that the balance of risks had not altered
decisively and that the right action at this meeting was to maintain the
current, highly expansionary, stance of monetary policy,” the minutes
said.

The majority took the view “it would be premature to tighten policy
while a significant margin of spare capacity remained and medium-term
inflation expectations remained anchored” and “premature to loosen
policy further without clearer signs that the economy was growing too
slowly to use up the margin of spare capacity, especially while
inflation was persistently above target.”

It seems very unlikely near term the MPC could suddenly decide it
was clear there is not a significant margin of spare capacity or, given
the back-dated nature of growth data, that growth is too slow to use up
that spare capacity. The justifications for inaction at the November
meeting look set to persist.

Analysts who had been predicting a near policy change rowed back
after the minutes came out.

In the wake of the minutes, economists at Royal Bank of Scotland,
who had been expecting more QE in February, expressed more caution after
the minutes, saying in a research note “May now looks more probable than
February.”

The JP Morgan economics team, which had also been predicting the
relaunching of QE in February, said – “We doubt the data will generate a
majority vote for QE in Feb, even though there remain risks that asset
purchases are extended next year.”

They now predict policy will be unchanged throughout next year.

The neutrality of the minutes, however, has also dampened
expectations of near term tightening.

The Nomura economics team, which has been predicting the first Bank
Rate hike will come in May, said the risks to this call were toward a
later increase.

Alongside the minutes, the Bank of England also published the
detailed forecasts underpinning the November Inflation Report.

These showed that on unchanged policy the mean forecast is for CPI
to stand at 1.99% two years down the line, as close as makes no
difference to the 2.0% target. The modal forecast, at 1.59%, marks an
undershoot with a 0.4 percentage point skew.

BOE Governor Mervyn King summarised the projections at the November
Inflation Report press conference, saying “Towards the end of the
forecast, the Committee judges that it is about as likely that inflation
will be above the target as below it.”

The broad picture from the November Inflation Report was that it,
along with the minutes, does little to support either near term
tightening or easing.

The BOE numerical forecasts put Q4 inflation at 3.2%, bang in line
with the October CPI outturn, the first of that quarter’s data.

For now, inflation continues to run well above target and is likely
to continue to do so, adding to the pressure on the MPC not to provide
further stimulus for fear of driving up inflation expectations.

MPC member Martin Weale, in a speech on Nov 12 which focused on
his estimates of the large margin of spare capacity in the UK economy,
warned against more QE over inflation expectation concerns.

“Inflation over the next few months may well rise further, even if
a subsequent decline is expected. I certainly worry about the effect on
inflationary expectations of introducing additional monetary stimulus in
such circumstances,” he said.

The BOE MPC has not moved policy since its November meeting last
year – and the minutes marking the first anniversary of that meeting
suggest this pause could continue for a good while yet.

For more information contact UK editorial on 44-20-7862 7491 or e-mail:
drobinson@marketnews.com.

[TOPICS: M$B$$$,M$$BE$]