Quantitative easing policy still a possibility for the Bank, say analysts

The Bank of England is likely to signal that further quantitative easing remains possible when it publishes its quarterly forecasts tomorrow.

Markets are still betting the central bank may eventually expand its 200bn asset purchase programme after a similar move by the US Federal Reserve last week, although recently firm data have reduced expectations of such a move.

Policymakers may be reluctant to unsettle investors by ruling out any additional quantitative easing because they will want to see how 81bn of government spending cuts hit activity when they start to take effect in 2011.

Hide Ad
Hide Ad

But with inflation holding well above the BoE's 2 per cent target all this year and likely to stay there in early 2011, the spotlight will be on Governor Mervyn King's news conference for insight into how the BoE perceives the balance of risks.

"We've had some reassuring economic news over the past couple of months, but not enough to make the MPC sufficiently confident over the direction of the next move in policy," said Philip Shaw, economist at Investec. "There remains a chance – although less than 50 per cent – that the committee will sanction further QE.

"Markets are going to look at the tone of the Inflation Report to see whether that remains the case, and we suspect that it probably will do, despite the brighter news on the real economy and some disappointing news on in-flation."

Inflation has been at least 1 per-centage point above the BoE's target throughout this year, forcing Governor Mervyn King to write a series of explanatory letters to the government.

Hide Ad
Hide Ad

The forecasts are likely to show inflation further above target in early 2011 than predicted in August, due to a recently announced rise in energy bills, although the BoE will probably maintain its forecast for below-target inflation further out. "We expect the November Inflation Report to bear a close resemblance to that in August, perhaps indicating a small bias to loosen but with the main stress being on the heightened uncertainty surrounding the outlook, with the result that the next move in policy could be in either direction," said Simon Hayes at Barclays Capital.