LONDON (MNI) June 22 – Recent commentary by Bank of England
Executive Director Markets Paul Fisher and in the June Monetary Policy
Committee minutes have raised the possibility of the relaunch of
quantitative easing – but it won’t happen unless the economy
deteriorates markedly.

Fisher’s full remarks about QE during a Q and A session following
a speech here Tuesday and the minutes released today make clear that
the BOE’s forecast for inflation would have to fall sharply before the
MPC goes ahead and sanctions further QE.

The minutes said that for some MPC members in the no policy change
camp “it was possible that further asset purchases might become
warranted if the downside risks to medium-term inflation materialised.”

With Adam Posen already voting for more QE, the wording in the
minutes imply that at least two other MPC members have floated the
possibility of further QE.

One of those two MPC members (it could be more) was undoubtedly
Fisher and a guessing game is on to identify the other(s).

Analysts suggest BOE Governor Mervyn King is one likely candidate.
Another suspect is David Miles, who has authored work claiming QE can
have a powerful impact, through portfolio effects, but who has kept
quiet in public about monetary policy of late.

In his speech on Tuesday, at the Global Borrowers and Investors
Forum here, Fisher defended the MPC’s prolonged policy pause.

Fisher raised some key points about QE. The first was that the
risks facing the MPC are asymmetric – the MPC knows how to tackle
excessive inflation but not deflation, and he argues QE would have to be
relaunched if there was a serious risk of deflation materializing.

His second point was that while QE is “on the table” it is far from
being the most likely outturn.

“If inflation goes too high and becomes embedded, you could sack
the current MPC, who got it wrong, you could put new members in,
increase interest rates and inflation would come down. It’s
relatively straightforward,” Fisher said Tuesday.

The opposing risk, for Fisher, is that even relaunching QE might
not be enough if deflation becomes a reality.

“If we get stuck in a deflationary rut it’s not clear that we have
sufficient ability to get out of that very easily. We’ve already tried
stg200 bln of asset purchases, we’d probably have to do an awful lot
more in those circumstances with no guarantee of success,” Fisher said.

So, in his view, QE could be relaunched as a pre-emptive strike
against deflation, but he stressed it is not the most likely scenario
and he said he hoped it never happens.

Asked about QE, Fisher said: “It always starts with our medium-term
assessment of inflation … if we saw that sinking down toward deflation
territory (that) is, I think, where asset purchases would come in. What
would cause that to happen would be a sudden tip-over in growth now and
that it is a risk.”

“I really hope that it doesn’t come to that and that isn’t
our central expectation by any means. It’s still very much on the table
as one of our potential policy actions. People should be aware of that,”
he added.

While Fisher and a couple of his colleagues are floating the idea
of more QE, two members of the MPC still voted for a hike in Bank Rate
at the June meeting.

The MPC has come in for criticism for allowing CPI to rise to 4.5%,
more than double the 2.0% target, and the minutes revealed the
expectations is it will rise further, “probably to above 5% before
subsiding.”

The two MPC members who voted for a hike, chief economist Spencer
Dale and Martin Weale, cited concerns that elevated inflation will
become embedded in higher inflation expectations.

For them “the argument for removing some of the monetary stimulus
at this meeting remained strong, although both acknowledged that the
data on the growth outlook during the month had been weak,” the minutes
said.

They took the view the prospect of rising CPI “increased the risk
that households and businesses would come to expect above-target
inflation in the future, possibly leading to higher inflation itself.”

The divisions on the MPC are large and there are clear fractures
even within the no change camp.

At the hawkish end of the spectrum BOE Deputy Governor has said
for him the decision has been “finely balanced” – between a hike and no
change rather than more QE.

Fisher has come out at the dovish end of the no change camp, and
King’s downbeat assessment of the economy suggests he is there too.

The two unknowns on the MPC at present are Ben Broadbent, who
attended his first meeting in June, and Miles.

Broadbent voted for no change in June and there were no fresh
arguments that could be linked to him.

His comments in his previous job, at Goldman Sachs, were seen as
hawkish. For example, in an op-ed piece in the Financial Times Broadbent
he wrote “In short, it looks as if rates should rise sooner than Mr King
would like.”

But his testimony before the Treasury Select Committee at his MPC
confirmation hearing was neutral.

In the meantime, the expectations are that the MPC’s prolonged
policy pause will go on and on.

Based on SONIA, markets are now not fully pricing in a
25-basis-point rate hike until July 2012.

–London Bureau; Tel: +44207 862 7491; email: drobinson@marketnews.com

[TOPICS: M$$BE$]