LONDON (MNI) – Analysts’ consensus view is the Bank of England
Monetary Policy Committee will not extend quantitative easing at its
March meeting, with a substantial minority still believing the MPC will
increase QE at its May meeting.
Analysts cite the recent flood of public remarks by MPC members as
supportive of their case for no further stimulus in May. The minority
views are that either the economy will turn out weaker than the MPC
expects, tilting the scales to more stimulus, or that the committee will
repeat the pattern of the first wave of QE, winding down the second wave
with a final stg25 billion increase.
A Market News/NTKN survey found none of the 37 economics teams
covered expected any policy change from the MPC this month. Of the 31
which gave a forecast for May, 17 expected no increase in QE and 14
forecast QE would be extended, with the median forecast for no
change.
Alan Clarke, economist at Scotia Capital, sets out the majority
view, that the MPC’s recent comments “support the view they will finish
QE (extended in February) after three months.”
He says no extension in May is not a done deal but “you would need
to have a radical departure from their central forecast” for the MPC to
sanction more stimulus.
The central, modal projection in the MPC’s February Inflation
Report showed CPI falling from 3.35% in Q1 to a trough of 1.61% in Q1
2013 and rising to 1.78% by Q1 2014, the end of the two year forecast
horizon.
In theory, that leaves a little scope for further stimulus to push
CPI up to hit the 2.0% CPI, but the projections show inflation on a
rising trend and MPC members have stressed they are not in the business
of fine-tuning policy.
Simon Hayes, economist at Barclays Capital, is not expecting any
further QE now or in May. He says that so far the economy has evolved
“pretty much in line with the MPC’s central forecast”.
Hayes notes that even the MPC’s arch dove, Adam Posen, who
spearheaded the drive for the second wave of QE, said in recent evidence
to the Treasury Select Committee that the February Inflation Report
forecasts were close to his own, and as the report showed the risk of
inflation coming in above/below target was broadly balanced this
suggests even Posen may not vote for more stimulus.
“I do share now … the modal forecast for the Committee and the
Inflation Report broadly, which means I do think the risks are balanced.
I am slightly more worried that it will go on the downside,” Posen told
the TSC.
Another member of the MPC, Martin Weale, used a recent speech to
say he did not believe he was likely to vote for further QE but his
colleague, David Miles, muddied the waters by making the activist case
for aggressive stimulus to boost activity now and bring forward the
timing of the first rate hike.
“Aggressively loosening monetary policy now might bring us closer
to the point at which Bank Rate could be moved back towards a more
normal level … This is an argument that influences the way I see
monetary policy today,” Miles said.
John Hawksworth, head of PwC Macroeconomics, says their central
scenario is based on the assumption the MPC will not do any further QE.
Hawksworth’s PwC colleague, ex-MPC member Andrew Sentance, also believes
QE will not be extended based on his interpretation of his former MPC
colleagues’ recent remarks.
Hawksworth says there are diminishing returns to QE as Gilt yields
are driven lower and lower and “we don’t think the latest stg50 billion
is going to make a great difference at the macro level.”
PwC expects 2012 growth to come in a little weaker than the BOE is
expecting, at around 0.6% compared to the central bank’s O.9%, but it
sees growth strengthening in the second half.
If the MPC does not do more QE by May, the case could diminish if
the economy strengthens as expected as the year progresses.
Some of those analysts forecasting further QE cite the experience
of late 2009. The MPC wound up the first wave of QE by sanctioning a
stg25 billion increase, even though the BOE’s inflation forecast at the
time was not readily compatible with such a move.
Hayes, however, believes the MPC this time around may be more
confident that it can stop and start QE as required and that as it is
explicitly opposed to fine tuning it will not go for a smaller final
tranche.
In the first wave of QE there was concern about how the market
would react to it coming to a sudden halt.
In any event the March MPC decision, with policy left on hold, is
seen by all analysts as a foregone conclusion, with the announcement due
at 1200 GMT Thursday.
–London bureau: +4420 7862 7491; email: drobinson@marketnews.com
[TOPICS: M$$BE$]