LONDON (MNI) – Analysts believe the Bank of England’s Monetary
Policy Committee is set for a prolonged pause in policy, with the
committee reluctant to use quantitative easing for fine tuning.

A Market News survey found analysts’ median forecast for the first
hike in Bank Rate has been pushed back from Q1 to Q2 next year, with
just one 25 basis point increase expected by mid 2011. The economists
put a 30% chance on more quantitative easing, citing MPC reluctance to
relaunch QE unless things take a sharp turn for the worse.

The BOE’s August Inflation Report, coupled with recent soft
activity data, provides ammunition for any MPC member arguing for
increased monetary stimulus.

The Inflation Report’s central projection showed CPI falling back
below the BOE’s 2.0% target in Q1 2012 and staying below target right
through to the end of the forecast period on both flat and market
interest rate expectations.

Despite this, the MPC supported no policy change in August.
Analysts are united in the view there will be no move in Bank Rate and
no extension of QE at the September meeting either.

There is evidence that UK economic activity slowed markedly in Q3
compared to Q2. The purchasing managers, PMI, indices from Markit for
August showed a sharp deceleration in services growth and easing in
manufacturing output.

Markit said its PMI-based model indicated third quarter growth
could be 0.5%, or less, on the quarter, compared with 1.2% in the
second.

While a 0.5% outturn would be roughly in line with the BOE’s
implied forecast from August, the central bank is expecting more robust
growth further ahead and, if the soft growth continues, it faces having
to cut its growth forecasts, which would put downward pressure on its
inflation projections.

Malcolm Barr, economist at JP Morgan, is one of the minority of
analysts who believes the MPC will end up sanctioning more QE. He
says the MPC does not have much scope to lower its growth projections
and “still maintain this is compatible with no policy action.”

Barr acknowledges, however, the MPC’s difficulties in sanctioning
only a modest increase in QE to offset the impact of disappointing
growth rather than a more dramatic downturn.

“I don’t think the MPC thought there would be a case for
incremental policy support,” he said.

UBS’ Amit Kara, a former BOE economist, is highly skeptical about
the benefits of the MPC relaunching QE, and he does not expect it to do
so, unless faced with a double dip recession.

The MPC’s version of QE has consisted very largely of buying vast
quantities of gilts.

Kara notes that gilt yields are currently at historically low
levels, back where they were when QE was launched, and UK interbank
spreads, unlike their euro area counterparts, are flatlining. While
relaunching QE would probably push gilt yields down still further, the
benefits may be marginal.

One key area of weakness in current UK conjuncture, of low bank
lending to SMEs, may not be solvable by QE.

“I don’t think QE is the answer to the problem,” Kara said.

He notes that BOE Governor Mervyn King recently told the Treasury
Select Committee the lending difficulties in the UK should be dealt with
through government action, not by the central bank.

“I do not think there is a monetary response that we can make that
helps the particular challenges facing the small and medium-sized
enterprises; it is a matter for government,” King said.

In a Dow Jones interview, MPC member Adam Posen made clear he does
not think of QE in the same way as a move in Bank Rate – something that
can be altered as one-off measure.

“If we do it [quantitative easing] again, we’re probably not going
to do it in dribs and drabs. It is an instrument that is best done for a
sustained period,” Posen said.

That view, if shared by his colleagues, entails the hurdle will be
higher for a relaunch of QE than a move in Bank Rate in normal
circumstances.

With growth softening – analysts’ belief is the MPC will simply sit
tight, as it has through a string of above target inflation outturns,
with its policy pause set to run not just through this calendar year but
well into next.

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

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