Bank taking ‘wait and see’ line on QE and interest rate

The Monetary Policy Committee kept its quantitative easing programme steady at £375bn and held interest rates at their record low of 0.5 per cent – where they have sat since March 2009.

While new figures offered fresh hope for the outlook for the British economy, some economists yesterday forecast the MPC would act next month.

Allan Monks, economist at JPMorgan Chase Bank, said: “Given the weak euro area backdrop, we believe the UK data would need to improve more decisively to talk the MPC out of doing more next month.”

IHS Global Insight economist Howard Archer added: “We suspect that it is more a matter of when, rather than will, the MPC approve further quantitative easing to try and support the economy.”

Although widely anticipated, the decision gave the pound a slight boost, with sterling recovering earlier losses against the euro and narrowing the gap on the dollar. Some MPC members have voiced fears more QE could weaken sterling dangerously.

The unchanged decision came despite the Bank being given a more flexible remit to disregard inflation risks when setting monetary policy.

Chancellor George Osborne last month allowed the central bank to make “short-term trade-offs” between inflation and growth, in a bid to spur faster economic recovery.

The Bank expects inflation to remain above its two per cent target for the next three years before falling back.

Chris Williamson, economist at Markit, said: “The onus lies clearly with the Bank to reinvigorate what continues to look like a miserable-looking economic recovery and counteract austerity-focused fiscal policy.”

The vote by the MPC’s nine members is likely to have been finely balanced.

Outgoing Governor Sir Mervyn King and fellow rate-setters David Miles and Paul Fisher repeated calls for another £25bn of QE at last month’s meeting.

However, they were voted down by other members of the committee over fears of the impact on the pound.

Stephen Gifford, CBI director of economics, said: “While muted growth prospects and international uncertainty will keep open the possibility of further QE, the persistence of above-target inflation may act as a bar to looser policy.”

He was supported by National Australia Bank economist Tom Vosa who said growing signs of optimism in the UK combined with the outlook for inflation meant the “hurdle” for starting a fresh round of QE next month “remains high”.

Economists at Capital Economics said the arrival of new governor Mark Carney in July is likely to “jump-start the committee into action”.

They said: “We doubt that the MPC will sit on its hands for too much longer.

“In the meantime, the longer the committee waits, the greater the chances that the economy stagnates for another year.”

The Bank has opted to pull different stimulus levers in recent months amid fears asset purchases are losing their punch.

A survey this week showed one of those levers, Funding for Lending – a joint Treasury and Bank of England scheme – is increasing the availability of mortgages, plus cutting the cost of home loans.