BOE Preview: Analysts: Close Call If More MPC Back Posen On QE
–Median Forecast Shows Analysts Expect 2 Votes For More QE At Sep Meet
–Very Close Call Between 1 and 2 Votes For More QE
–Most Analysts Reject Idea BOE Quarterly Bulletin Article Policy Signal
LONDON (MNI) – Analysts are split down the middle over how Bank of
England Monetary Policy Committee members voted at their September
meeting, with the narrowest of majorities expecting at least one more
member to have joined Adam Posen in backing relaunching quantitative
A Market News poll, conducted largely Monday and Tuesday, found
nine out of 19 analysts expecting one more member to have backed Posen
on relaunching Q3. With one analyst expecting two MPC members to
have supported him the median forecast, by the narrowest of margins, is
for his prolonged isolation to have ended.
Posen has been alone in voting to extend QE since October last
year, with no other member supporting it since back in November 2009.
The MPC members mentioned by analysts as most likely to have joined
Posen are the usual suspects, Executive Director Markets Paul Fisher and
independent member David Miles.
Richard Barwell, economist at RBS, says that if anyone backed Posen
it would have most likely have been BOE Governor Mervyn King.
King downplayed the differences between his views and Posen’s back
in late June when they appeared together in front of the Treasury Select
After Posen set out his case in favour of relaunching QE King said
“I share qualitatively much of what Adam says,” but added that they had
Minutes Won’t Signal More QE Imminent
With inflation still widely predicted to head higher, the MPC
majority is expected to favour delaying the second wave of QE, if
The September minutes, out Wednesday, are thought likely to
reaffirm the message that the MPC’s central view is that QE will only be
used if things deteriorate further and there is a marked softening in
the inflation outlook.
“If they have the luxury, they will wait until inflation actually
falls (before launching QE2),” says Amit Kara, economist at UBS.
The inflation backdrop at present is troublesome for the MPC. The
August survey commissioned by the BOE of public inflation expectations
showed inflation over the coming year was expected to be 4.2%, up from
3.9% in the previous quarterly survey and more than double the MPC’s
Alan Clarke, economist at Scotia Capital, sees headline CPI rising
to 5.25% by November, having posted 4.5% in August, and the BOE’s August
Inflation Report projections showed it averaging a sliver under 5% in
Kara warns, however, that the MPC may not have the luxury of
holding off QE until inflation eases.
He says if there was a big push for co-ordinated central bank
action or if there was a full blown eurozone crisis “the BOE would have
The MPC has, however, highlighted the difficulty of both
quantifying the risks posed by the eurozone debacle and the majority on
the MPC believes it would be ill-advised to act in anticipation of what
happens in the euro area.
The August MPC minutes said, “the greatest risk to the downside
stemmed from the euro area” but the “risks were almost impossible to
calibrate in terms of their probability or impact.”
The minutes added that “most members saw little merit in seeking to
react to the possibility of these risks crystallising by adjusting
monetary policy in advance.”
The line taken in the September minutes is likely to be very
similar, with the majority taking the view more QE should be deployed
only if the downside risks are realised.
The August minutes recorded some MPC members believed “further
asset purchases might nonetheless become warranted were some of the
downside risks to materialise.”
BOE Research Helps Quantify Possible Scale of QE
One piece of BOE research published since the MPC’s September
meeting, on Monday in the Quarterly Bulletin, was highlighted by several
The Bulletin’s article aimed to quantify the impact of the stg200
billion worth of QE the MPC had previously sanctioned – arguing its
effect on growth and inflation was substantial.
One analyst, Michael Saunders at Citi, said in a note that the
Quarterly Bulletin article was part of a “softening-up process to
prepare markets for more QE in October or … November.”
Other economists, including several who have worked at the BOE,
firmly rejected this view. The gestation period for the QB is lengthy
and it is not viewed at the central bank as part of the MPC’s
UBS’ Kara, a former BOE economist, noted QB articles are usually
worked on months in advance of publication. Economists at Barclays
Capital, where senior UK economist Simon Hayes is another ex-BOE
employee, noted the BOE would be very unlikely to prepare markets for a
policy change by using what is a staff, rather than MPC, publication.
Nevertheless, the Bulletin article was welcomed by economists as it
provides a “ready reckoner” for the impact of QE, and therefore the
likely amount the MPC may sanction if it is needed.
The article said the maximum impact of the stg200 billion QE was to
boost GDP by 1.5% to 2.0% and CPI inflation by 0.75% to 1.5%.
David Tinsley, economist at BNP Paribas, says the implication is
the MPC would likely be looking to do markedly less than stg200 billion
this time around if it launches QE with, say, a 1% boost to GDP
requiring stg75 billion to stg100 billion in QE.
Philip Rush, economist at Nomura, notes the BOE’s August Inflation
Report predicted CPI would come in only a shade (12bps) below target on
the modal forecast. The stg50 billion extra QE advocated by Posen would
add as much as 40bp to inflation on the BOE’s calculations.
That would argue in favour of the central message from the minutes
being once again to emphasize the MPC is ready and willing to sanction
more QE, but only when the majority are convinced the inflation outlook
The September minutes will be published at 0830 GMT Wednesday.
For further information contact David Robinson on 0207 862 7491 or