THE BANK of England will have to decide next month whether to continue expanding its programme of money-creation and asset purchases after it kept monetary policy unchanged yesterday.
As had been widely predicted, the monetary policy committee (MPC) chose to keep interest rates on hold at 0.5 per cent and continue with the existing programme of buying £175 billion of assets.
So far the bank has created £158 billion and used that money to buy assets, all but £2 billion of which have been government bonds.
In a statement, which did not address economic issues, the MPC said it expected “the announced programme to take another month to complete”.
Markets moved little on the MPC’s decision, although there is a growing belief among bond traders that the official interest rate will stay low for a long time. The yield on benchmark two-year government bonds briefly hit an all-time low, falling below 0.7 per cent.
However, that belief was not shared by economists, who continue to argue about whether quantitative easing is working, whether more of it is needed and what the bank will actually do in November.
The bank’s efforts over the past month to help outsiders understand its thinking, through speeches and private meetings, has failed to generate a common understanding of what the MPC thinks are the important issues surrounding the decision.
Business lobby groups renewed their calls for further action.
Ian McCafferty, the CBI’s chief economist, said: “The bank must take no risks in ending the programme prematurely.”
David Kern, chief economist at the British Chambers of Commerce, said: “To counter serious risks of relapse, we urge the MPC to raise the QE programme to £200 billion.”
Colin Ellis of Daiwa Securities also called for further easing, stressing: “The problem is the MPC may think that QE is having more impact than it actually is.”
In trying to predict what the MPC will do rather than making recommendations for the committee, economists highlighted a range of issues.
Roger Bootle, economic adviser to Deloitte, said he expected further action from the MPC next month because the recession had created “a huge amount of spare capacity will be bearing down on inflation”.
This view is consistent with the often-repeated view of Mervyn King, governor of the Bank of England, that it is the levels of output that matters, not whether the economy returns to growth.
However, other economists believe the bank will not extend quantitative easing, even in the face of huge spare capacity, because the programme already in place will be sufficient to eliminate the slack in the economy.
Peter Dixon of Commerzbank said that if figures later this month showed the economy grew in the third quarter “we see little need for an expansion of the facility”.
George Buckley of Deutsche Bank also thought the bank would now sit tight, “particularly if the bank raises its forecasts for inflation and economic growth in the coming forecast round”. – (Copyright The Financial Times Limited 2009)
