Bank of England to sit tight on QE and base rate

The Bank of England is expected to sit tight when its Monetary Policy Committee (MPC ) concludes its October rate-setting meeting tomorrow morning.

The quantitative easing (QE) programme is expected to remain at £375 billion and base rate will remain at 0.50 per cent for a 44th consecutive month.

The last injection of money into the economy, £50 billion in July, is not expected to fully filter through to the economy until November. 

Overall, the economy is showing some signs of underlying growth, GDP in the third quarter is expected to at least reverse the 0.4 per cent decline seen in the second quarter.

However, the PMI Index for the manufacturing, construction and services saw growth slow slightly in September from August, meaning the fourth quarter could still see the economy struggling.

Howard Archer, Chief UK & European economist at IHS Global Insight believes this means that more QE is likely in the fourth quarter.

He said: “We believe the odds are still heavily slanted towards more Bank of England stimulus in the fourth quarter.  Although the economy is currently showing some signs of improvement and inflation could be sticky over the coming months, it is extended weak economic activity rather than inflation that remains the greatest risk facing the UK economy.

“Indeed, reduced overall manufacturing, services and construction expansion in September compared to August indicated by the purchasing managers’ surveys suggests that the economy is unlikely to achieve anything more than modest growth in the fourth quarter – and even that is by no means guaranteed.”

However, the MPC is also concerned about inflation which could be pushed up by more QE, so a further injection of money into the economy in the fourth quarter is not a certainty.

The minutes from September’s meeting suggests that more stimulus is likely but not yet. It also showed that there is not much enthusiasm within the MPC to cut base rate from 0.50 per cent to 0.25 per cent.

An extract from last month’s minutes said: “Some members “felt that additional stimulus was more likely than not to be needed in due course.”

The minutes said that keeping things as they were last month was a “relatively straightforward” decision and that only one MPC member felt that the decision on whether to raise QE or keep it at £375 billion was “finely balanced”.

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