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Bank of England MPC minutes: what the analysts say

As the Bank’s monetary policy committee edges towards more quantitative easing, the experts give their views

Minutes of the last Bank of England’s monetary policy committee revealed that it is edging closer towards resuming its quantitative easing (QE) programme. Here is what economists made of the minutes.

Alan Clarke, Scotia Bank

The minutes of the September MPC meeting showed a further evolution in the dovish direction. Quite striking was that the summing-up section seems to identify some explicit groups on the MPC. Most members agreed that the case for immediate resumption of asset purchases had significantly strengthened which was clearly dovish. Moreover, “for some”, if conditions experienced over the last month continued, an expansion “at a subsequent meeting” would be justified.

The point is this seems to hint that there are two or three members that want to resume asset purchases very soon – meaning at least one other dissent is imminent if the data don’t improve. Others are probably waiting for more deterioration or are holding out for until inflation has come down from its peak.

The committee discussed different possibilities for how to embark on further policy ease, including QE, increasing the maturity of the Bank’s holdings of gilts (a bit like operation twist), reopened discussions about a possible rate cut and explicit guidance on the future path of monetary policy – rather like the Fed. Some of those seem more likely than others. The committee has indicated that if the macro outlook deteriorates it will deliver more policy ease. The macro outlook is deteriorating so it is looking more and more like a case of when and not if. There is the added dimension of how, though it seems that purchases at the longer end of the curve are amongst the most likely.

The latest inflation report projections showed inflation two years ahead at 1.7% to 1.8%. The minutes show the committee now thinks the risks to that are even lower. The final instalment of QE1 happened when the two-year ahead forecast was around 1.6%. So we are getting pretty close to that level.

Malcolm Barr, JP Morgan

Although we were surprised that the minutes of the September MPC meeting did not show anyone joining Adam Posen’s vote for more QE, the text leaves no doubt that the committee is moving toward that action. A few quotes suffice to make the point – there is no need for picking up on subtleties because the message is overt.

The September minutes also saw the committee discuss the options on the table to provide more stimulus. It listed asset purchases, changing the maturity of asset held, a Bank rate below 0.5%, and explicit guidance on Bank rate beyond the judgments explained in the inflation report. We continue to think that movement along any of these lines is unlikely at this stage. Rather, we would expect gilt purchases to be extended by a further £100bn before they came into play. By the time that has happened, we suspect policy initiatives designed to ease credit availability for small and medium sized firms will have moved up the agenda. These were not listed by the MPC as an option “at this juncture”, and we suspect that majority on the MPC are not as keen as Adam Posen to be the source of such efforts. Even so, our best guess is that the MPC would be supportive of such actions if proposed by the coalition government.

Little in the discussion of the data and events was particularly eye catching: the key developments being the downside news on activity globally during the month, intensifying financial stresses, and the sharp fall in the services PMI. As we highlighted in a research note this week, weak pay growth and stability in most measures of medium-term inflation expectations are encouraging the MPC in its assessment that inflation pressures are temporary, even if there are “risks associated with easing policy during a period of sustained above-target inflation and there were concerns about how quickly inflation would fall back to target”.

Neil Prothero, Economist Intelligence Unit

The Bank of England’s selective assessment in its latest quarterly bulletin of the “economically significant” impact of the first round of quantitative easing in 2009-10 is clearly aimed in part at preparing the ground for additional money printing in the months ahead. We have been highlighting for some time the probability of “QE2″, given the depressed economic outlook, and the August MPC minutes are likely to show a clear shift in sentiment at the Bank towards implementing a new round of stimulus. We expect QE2 to be announced before the end of 2011, despite widespread scepticism over its effectiveness in boosting the real economy – long-term borrowing costs are already low, import prices are worryingly high (and are likely to rise further as money-printing weighs on sterling), credit demand from overleveraged borrowers is understandably weak, and further artificial support of asset prices is unlikely to do much to aid the structural rebalancing of the economy. More “unconventional” forms of QE, targeting public investment and credit availability for small and medium enterprises, would probably be more beneficial, but the Bank (for now) appears reluctant to take such steps.

Nida Ali, Ernst & Young Item Club

The major question for this month’s minutes was whether any member (other than Adam Posen) would vote for more QE. Although that hasn’t happened just yet, the sentiment is steadily moving in that direction. The tone of September’s meeting was very dovish, with concerns about the recovery increasing due to adverse developments in the global economy.

Though the minutes continue to pay lip service to the risks of prolonged periods of high inflation, it’s clear that the recent high rates are now of secondary importance. The idea that inflation is high due to temporary factors is well rehearsed and, chances are, we will hear it again in subsequent minutes, particularly if the MPC reacts to the weakening recovery by loosening policy.

The growth outlook both on the international and domestic front has disappointed and, amid a raft of weak data, there are hardly any signs of a turnaround in the months ahead. Despite the fact that inflation is forecast to top 5% later in the year, MPC members are more concerned about steering monetary policy in a way that the economic recovery remains afloat. © 2011 Guardian News and Media Limited or its affiliated companies. All rights reserved. | Use of this content is subject to our Terms & Conditions | More Feeds