LONDON (MNI), Dec 6 – Quantitative easing is on hold for now, but
it’s too early to write its obituary as a divided Bank of England
Monetary Policy Committeee sees lingering hopes of a robust UK recovery
fade away.

Sharp downgrades to growth forecasts, for years ahead, are all the
rage but MPC members have to wrestle with the dilemmas posed by sticky
inflation and their own uncertainty over how effective their policy
weapons will prove to be.

The outcome of the December MPC meeting is seen as a foregone
conclusion, with analysts united in the belief there will be no change
after the MPC voted 8 to 1 for unchanged policy at its November

Some analysts, however, have simply rolled back their forecasts for
a QE extension to February.

The Office for Budget Reponsibility slashed its growth predictions
that accompanied Chancellor of the Exchequer George Osborne’s belated
Autumm Statement on Wednesday. This followed the MPC’s move in its
November Inflation Report to simply remove the likelihood of a rapid
rebound from its range of plausible outturns.

The OBR’ central forecast is for -0.1% growth this year and 1.2%
next, down from its March forecast of 2.0%, and only a smidgin more
gloomy than the BOE’s latest implied forecast of 1.25% in 2013.

With the Treasury having to push back its debt target by a year,
having originally aimed to get debt/GDP on a downward path by 2015/16,
Osborne announced another year of fisal austerity in 2017-18.

Against this gloomy backdrop of weak growth and extended austerity,
MPC members have to wrestle with the dilemmas posed by sticky inflation
and the uncertainty over the likely impact of other stimulus measures,
most notably the BOE’s own credit easing flagship, the Funding for
Lending Scheme.

Small wonder that the extensive recent testimony of MPC members at
the Treasury Select Committee showed they were divided.

Their views ranged from Martin Weale’s skepticism over further QE
to Executive Director Markets’ Paul Fisher’s belief that more is more
likely than not.

The no change vote at the November 7 and 8 MPC meeting was not as
straightforward as it looked at the time, in part because it was later
revealed the MPC had been informed that the Treasury had carried out
some QE via the back door, ordering the transfer of some stg37 billion
of gilt coupons from the BOE to itself over this fiscal year and next.

MPC member Ben Broadbent had been viewed as one of the more hawkish
members of the committee, but in his November 27 evidence to the TSC he
revealed he had actually been ready to back more QE at that month’s

“I went into that meeting, if anything, feeling that I was going to
vote for more asset purchases … The economy had turned down, the
output indicators were pretty weak,” he said.

Broadbent said there were two things that led to him not voting for
more QE – the fact “we already had some easing effectivley through this
coupon transfer” and, secondly, “inflation was stronger than I had
expected for reasons that were likely to persist into future years.”

Executive Director Markets Fisher was another who sounded like he
had been close to backing more QE, saying the decision was “finely
balanced” and adding “it remains the case that we are more likely than
not to need more monetary stimulus in the future.”

BOE Governor Mervyn King was also adamant that QE is not a busted
flush and said if more stimulus was needed, it would be through
purchases of gilts.

A central problem for the MPC, however, is that inflation is still
holding above its 2.0% target and there is a substantial risk it will
stay there.

The OBR forecasts inflation will average 2.5% next and 2.2% in
2014, while the MPC predicted it would only drop below 2% by Q3 2014.
The latest CPI print showed it rose to 2.7% in October, up from 2.2% in
September, in part because of hikes in utlity prices and student fees,
which as “administered” increases can’t be predicted from within the
BOE’s own models.

While some pundits have made a great deal out of the gilt coupon
transfer, MPC members have tended to downplay it, with Broadbent saying
while it did influence his no change vote “the more important reason was
the inflation print.”

Weale too has highlighted the problems of voting for more stimulus
while inflation is stuck above target as has Chief Economist Spencer

Having chosen not to boost QE in November, after completing their
latest quarterly forecasting round, the debate among analysts is now
centred on the meeting following the next forecast round, in February.

The latest weak activity data, suggesting growth could contract
again in Q4, look pretty much in line with MPC expectations, with its
implied forecast for a 0.2% quarterly decline, and won’t sway the

With credit markets, in particular, in good health at present, as
corporates have managed to get a raft of issuance away, and with the
euro area enjoying a period of relative calm, the MPC can afford to sit
tight for a while and see how things pan out, allowing markets a couple
of quiet months on the policy front.

The MPC will not pump up the stimulus to offset the extended
austerity just yet.

The MPC voted will be announced at 1200 GMT.

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