LONDON (MNI) – Further quantitative easing by the Bank of England
is warranted even though the present monetary policy stance is highly
accommodative, the Organisation for Economic Cooperation and Development
says in its latest Economic Outlook.

The OECD assumes in its latest forecast that the BOE will buy
Stg400 billion of gilts or 40% of the total stock of government bonds by
early 2012. 1

“With the Bank rate at 0.5% and quantitative easing (QE) recently
expanded to 18% of GDP (Stg275 billion), monetary policy is highly
expansionary. Even so, more support is needed urgently as headwinds are
strong. The projection assumes that the Bank of England increases QE
further to a total of Stg400 billion by early 2012, leaving the Bank
with almost 40% of the total stock of outstanding government bonds”.

The OECD says that “quantitative easing should be expanded further
still if the economy weakens more than expected”.

Analysts are presently looking for the BOE Monetary Policy
Committee to announce an expansion of QE in February when the present
Stg75bn programme expires. BOE Executive Director Markets Paul Fisher
told the Sunday Times in an interview published at the weekend that he
thought more still needed to be done.

In its outlook for the UK economy, the OECD says that the recovery
has been halted by weak global demand, consumer retrenchment and fiscal
consolidation.

“Further headwinds come from a weakening global economy, lower
asset prices and rising uncertainty related to the euro area debt
crisis”.

The reports says that fiscal retrenchment will remain a drag over
coming years, but slowing inflation and recovering exports from 2012
should help demand consumption and exports and bolster recovery.

“As consumer confidence improves and real incomes start to rise,
consumption growth will gain strength over 2012. In 2013, rising
business confidence and increasing capacity utilisation will support
business investment, quickening the recovery”.

While it concedes that inflation has peaked, it notes that it is
likely to remain above the 2% target through 2012, but a large negative
output gap and slow-growing unit labour costs should pull inflation
below the target in 2013.

Despite the government’s already ambitious consolidation plans, the
OECD says that government debt will continue to rise. The budget deficit
is estimated to fall to 9% of GDP in 2011 – still twice the EU average
and higher than other G7 countries, apart from the United States and
Japan.

“…planned fiscal consolidation tightening needs to continue
despite the significantly weakening economic outlook, and this is
assumed in the projection…the automatic stabilisers are assumed to be
left to work fully”.

–London Newsroom; Tel: +442078627492; email: dthomas@marketnews.com

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