LONDON (MNI), Sep 6 – The Bank of England Monetary Policy Committee
will sit on its hands at this month’s meeting and will sanction further
quantitative easing in November, but will not cut Bank Rate this year,
according to the results of an MNI/NTKN survey of economists.

The survey found unanimity among analysts that the MPC would leave
policy on hold this month. There is more widespread doubt over whether
the MPC will extend QE in November than over the likelihood of it
leaving Bank Rate on hold.

Of the 29 economists who gave a forecast for November, 19 expected
more QE while 10 did not, with the median forecast for a Stg50
billion increase. Only five of 27, however, predicted a cut in Bank Rate
this year.

When the June and July minutes of the MPC showed the committee
discussing the case for a rate cut, market speculation mounted that one
could be on the way. Most economists take the view the MPC is too
concerned about the potentially adverse effects of a rate cut to approve
one any time soon.

As economists at JP Morgan have pointed out, the MPC’s decisions on
a Bank Rate cut are not based on its likely aggregate effect on the
banking sector but are influenced by its potential impact on lenders,
particularly smaller lenders, which depend on deposits for funding.

If the BOE were to cut Bank Rate “the real issue is will deposit
rates be lowered on the back of this,” Allan Monks, economist at JP
Morgan, says.

If deposit rates don’t come down in line with the rate cut, margins
are hit. Lenders such as local building societies, which are heavily
reliant on attracting deposits to fund their lending, would run the risk
of being squeezed out of the market if rates come closer to zero, which
would be perverse at a time when the UK authorities are trying to
increase competition in the banking sector.

The Funding for Lending Scheme, under which the BOE will provide
banks with cheap funding in return for them maintaining or extending
lending, went live in August and may change the arithmetic. There is
widespread skepticism among analysts, however, that its likely impact
will be great enough to be a game changer for the MPC’s thinking on Bank
Rate in the months to come.

The spotlight instead is firmly fixed on QE and the November MPC
meeting.

The economy is struggling to claw its way out of recession and the
BOE in its August Inflation Report predicted flat growth this calendar
year despite penciling a sharp rebound in Q3, of some 1% on the
quarter.

More QE is likely this year because it is unlikely “the strength of
the recovery will be sufficient to make the BOE comfortable inflation
will meet its target in the medium term,” Joost Beaumont, an economist
at ABN Amro, says.

The current tranche of Stg50 billion of QE is on track to be
completed in the run up to the MPC’s November policy meeting and the
committee will have a fresh set of economic projections from its
quarterly forecast round at that meeting.

If the MPC decides at that stage the economy needs another
stimulus shot, the simple option is to sanction more QE.

As Beaumont notes, BOE Governor Mervyn King has publicly said a
25 basis point rate cut would be “neither here nor there”.

“Another quarter point on Bank Rate is not going to be the
difference between having a recovery, or not having a recovery,” King
said.

Things, however, have become a lot trickier for BOE watchers and
analysts’ views have become elusive to capture in straightforward
surveys, as the BOE extends its range of tools to support recovery.

In their research notes, some economists are already talking about
the BOE adopting such options as a “son of FLS” or “FLS2″ if the current
Funding for Lending Scheme does not do enough to boost credit flow.

The FLS is a joint project between the BOE and the Treasury and not
something the MPC has a vote on. Credit easing measures, which can be
extended or revised along the way, and have to dovetail with regulatory
changes, are all on the central bank’s policy menu.

Further stimulus from the BOE, if needed, may not be confined to
easy-to-tabulate QE or the questionable benefits of a rate cut.

As the MPC said in its August minutes, the committee would look a
the impact of the FLS and “the implications this had for other potential
policy options.”

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

[TOPICS: M$$BE$]