LONDON (MNI) – With the economic outlook darkening since May, the
Bank of England Monetary Policy Committee’s decision not to sanction
further quantitative easing at its June meeting was likely a close call.

The majority view among analysts is that the June minutes, out
Wednesday, will show only a couple of votes in favour of extending QE,
from David Miles and Adam Posen. Even if the vote was seven-to-two for
unchanged policy, however, the text of the minutes is expected to leave
the door wide open to extending QE in the very near future.

Past experience has shown MPC voting can be a less clear guide to
future policy than the text of the minutes.

In September last year, for example, only one MPC member voted for
more QE but all nine then voted for Stg75 billion extra in October. The
key policy pointer turned out to be the comment in the September minutes
that for most members the decision on further QE “was finely balanced”
and a repeat of this phrase is likely in this June’s minutes.

BOE Governor Mervyn King gave a taster of what are likely to be the
key themes in the June minutes in his Mansion House speech last
Thursday.

“Since our Inflation Report only four weeks ago, conditions have
deteriorated with weakening business surveys, a downward revision to
measured output and further slowing in economies overseas,” King said.

“With signs of a deterioration in the outlook, especially in world
markets, the case for a further monetary easing is growing,” he added.

No one on the MPC will have taken issue with King’s view that the
economic outlook had deteriorated and the case for further stimulus has
strengthened and some, or many, of those MPC members who did not back
more QE are likely to have said their decision was “finely balanced”.

Since King’s Mansion House speech, a growing number of analysts
have predicted further QE in July, while others think the MPC may cling
on to unchanged policy, but only until August. If the minutes were to do
anything other than pave the way for further stimulus it would be a
major surprise.

While a six-to-three, or five-to-four vote, would be more dovish
than expected, it would only reinforce, rather than alter, the
overriding market perception that more QE is imminent.

What is uncertain is whether those MPC members who have recently
voiced skepticism over the case for the third wave of QE, Chief
Economist Spencer Dale and Executive Director Markets Paul Fisher, will
have raised any strong objections to further stimulus at the June
meeting or whether they have fallen back in line behind King.

Dale has championed the argument that the UK’s exceptionally weak
productivity growth reflects supply side problems and just pumping out
more stimulus through QE may do little to strengthen growth at a time
when inflation is running above target.

“A feature of the past two to three years has been weak growth in
demand but also weak growth in supply, which we see in the productivity
figures. Some people say we can just pump more into the economy with QE,
but if weak growth reflects problems on the supply side of the economy
that may not be appropriate,” Dale said in a Sunday Times interview at
the end of May.

The concern over weak productivity growth was raised at the May
MPC meeting.

“Inflation might prove more persistent because tight credit
conditions and heightened uncertainty prevented the economy’s supply
capacity from growing at the pace the Committee expected,” the minutes
said.

As other MPC members, however, raised the alternative possibility
that “there might be more spare capacity than currently appeared
likely,” Dale’s argument is hardly a show-stopper for more stimulus.

Dale’s other concern has been that while base effects have ensured
headline CPI fell back to 3%, the next leg of its descent to around the
2% target is far less certain. The May CPI data, showing a further fall
to 2.8%, came too late for the MPC’s meeting.

One moot point is whether there was any discussion at the June
meeting on cutting Bank Rate.

There has been growing market speculation that the MPC will cut
Bank Rate and a reduction from the current 0.5% level, where the rate
has been since March 2009, is being priced in.

Since the launch of QE, the BOE’s view has been that Bank Rate
should only be cut to near zero, not zero. The debate was reignited when
the International Monetary Fund last month called on the BOE to
‘reassess’ the case for cutting the rate.

The last time the MPC looked at the issue was back in September,
ahead of October’s launch of QE2, and it concluded lowering Bank Rate
was not preferable to doing more QE.

If the June minutes show no discussion about lowering Bank Rate the
odds against a cut should lengthen, with so far no sign any member of
the MPC favours such a move.

The minutes of the MPC’s June 6 and 7 meeting will be published at
0830 GMT Wednesday.

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

[TOPICS: M$$BE$]