MPC policymakers to keep QE at £375b and base rate at 0.50%

Thursday, 06 December 2012 10:17


Economists do not expect to see a change in the Bank of England’s economic policy at the conclusion of this month’s meeting of the Monetary Policy Committee (MPC) later this morning.

Base rate is expected to be held at 0.50 per cent for a 45th consecutive month and the asset purchase programme of quantitative easing will stay at £375 billion.

Howard Archer, Chief UK & European Economist at IHS Global Insight said: “An increase in Quantitative Easing looks unlikely despite the very real possibility that the UK could suffer a renewed GDP dip in the fourth quarter, while an interest rate cut appears to be completely off the agenda.”

This is despite the latest set of purchasing managers indexes (PMI) for the manufacturing, construction and services sector for November being weak which could mean GDP contracts in the final quarter of the year.

The manufacturing sector fared reasonably well with the PMI showing that the sector contracted at the lowest rate for three months. However, the construction sector fell markedly, down from 50.9 to 49.3, its lowest level since August and with the sharpest drop in new orders since April 2009. The vital services sector saw its PMI drop from 50.6 to 50.2, the slowest rate of growth for 23 months.

The UK economy officially emerged from its double-dip recession in the third quarter with growth of one per cent but the optimism didn’t even last as long as the time the second estimate arrived last month before analysts began talking of a renewed dip and the possibility of an unprecedented triple-dip in the New Year.

Last month, the MPC decided to hold fire on more QE despite July’s last round of £50 billion fully integrating itself into the UK economy.

However, last month’s minutes suggest that the bank is keeping its options open on the possibility of more QE in the New Year, whilst also hoping that the Funding for Lending Scheme (FLS) will begin to make a bigger impact.

In recent weeks several MPC policymakers, including Governor King have questioned the impact that QE is having, suggesting that it may be having less benefit as the programme goes on.

Howard Archer said: “Reinforcing belief that further QE is unlikely as soon as December, the dovish David Miles was the only one of the nine MPC members who favoured more QE in November.  While the minutes recorded that “a case could be made for further monetary easing”, there was little indication that any other MPC member was leaning heavily towards further near-term stimulus.”

The first data from the FLS scheme suggested that while the scheme may be providing a benefit to mortgage borrowers with lots of equity, there has been scant improvement in lending to businesses.

Overall, lenders signed up to the scheme had taken out ten times more funds than they had lent out. It should be noted though that it is too early to say whether this will change and to make conclusions about the success or failure of FLS.

Both the Governor of the Bank of England and the Office for Budget Responsibility (OBR) have suggested that the economy is likely to shrink in the fourth quarter.

It is extremely unlikely that interest rates will change as in the last minutes the MPC said it "was unlikely to wish to reduce Bank Rate in the foreseeable future".

Howard Archer believes more QE is more likely than not with February 2013 the most likely month for the QE programme to be added to.

He said: “With economic recovery currently looking feeble, fragile and far from guaranteed, we continue to lean towards the view that the Bank of England will ultimately decide to give the economy a further helping hand with a final £50 billion of QE.

“Meanwhile, we expect interest rates to remain at 0.50% for at least another two years from here.”

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