Bank of England sees inflation falling and more QE likely
Wednesday, 25 January 2012 11:29
The Bank of England’s Monetary Policy Committee (MPC) released the minutes from their January rate-setting meeting which reveal that the MPC sees inflation falling to the target of two per cent by the end of 2012 and that it is likely to introduce a further round of quantitative easing next month.
The MPC also reported that they believe the actions of the European Central Bank (ECB) has reduced the risk of a “severe dislocation” to the European banking system. The minutes said: “The three-year long-term repo operation by the ECB on 21 December 2011 had improved market sentiment.”
This means that banks had increased the amount of money they were willing to lend and has reduced the possibility that the euro debt crisis will adversely affect the European banking system.
The Office for National Statistics (ONS) today released its first estimate of GDP in the UK in the final quarter of 2011 which showed the UK economy contracted by 0.2 per cent, increasing the likelihood that the UK would fall back into recession in 2012.
Similarly, a new report out today by the International Monetary Fund (IMF) on the prospects for the global economy reports revised lower estimates for most major economies. Growth for the UK in 2012 has been revised down to just 0.6 per cent. The main risk to the UK economy is still seen as coming from the euro debt crisis.
You can read the minutes by following this link.
UK economic growth outlook for 2012
Healthier economic reports in December did not do enough to stop the UK economy contracting in the fourth quarter but did give the MPC hope that there were grounds for optimism for the first quarter of 2012.
An extract from the minutes said: “If the output indices were to remain at their December levels over the coming months, this would point to a modest pickup in growth in the first quarter of 2012.”
Growth in the eurozone and United States
The MPC reported that a mild recession is expected in the eurozone in 2012 but that the United States was emerging from the recovery strongly.
The minutes said: “Third-quarter euro-area GDP growth had been revised down slightly to 0.1 per cent. In the United States, GDP growth looked to have rebounded in the second half of 2011 and the PMIs pointed to expansion. Fourth-quarter growth was likely to be around 0.8 per cent.”
Bank lending and economic investment
The minutes showed that the MPC believes the economy is at risk from a lack of investment.
“The way firms responded to the sustained period of weak final domestic demand would affect how quickly the economy recovered. The Bank’s Agents had reported a further weakening in investment intentions,” the report said.
Inflation
The MPC are confident that the combination of the higher VAT rate falling out of the figures in January and a fall in utility costs will combine to cause a sharp drop in inflation in the early months of 2012, something that is backed up by the latest official figures released by the ONS last week, which showed CPI inflation fell from 4.8 per cent in November to 4.2 per cent in December.
The minutes said: “The broad outlook remained the same as that at the time of the November Inflation Report, in which the central case was for inflation to fall by around 2 percentage points between November 2011 and March 2012 and then to fall back to around the target by the end of 2012. But heightened tensions in the Middle East raised the risk of a sharp rise in oil prices.”
Quantitative easing
The minutes report that some members felt that a further round of quantitative easing was likely to be required shortly.
The report said: “For some members, the risks of undershooting the target meant that a further expansion of asset purchases was likely to be required.”
The minutes concluded that no policy change to base rate or QE was required in January. “The Committee agreed that a decision to change policy at this meeting was not warranted. The balance of risks to inflation in the medium term had changed little since November,” the minutes reported.
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