By David Thomas

LONDON (MNI) – The Bank of England’s Monetary Policy Committee must
feel it has yet again been put on the back foot by the recent more
dismal turn in the economic data.

Following their decision to boost QE by an additional stg50bn in
February and an Inflation Report forecast putting 2-year CPI pretty much
bang on target seemed to suggest that the MPC felt it had probably done
enough for the time being.

MPC Members Martin Weale, BOE Deputy Governor Charles Bean and
Chief Economist Spencer Dale all made clear – either explicitly or
implicitly – that they would be disinclined not to do yet more QE.

But, as in 2011, underlying growth seems to be relapsing.

Speaking to the House of Lords Economic Affairs Committee this
week, King said left the issue open:

“I don’t know if it’s going to be required or not. We do make a
fresh judgement each month as to what we think is necessary. We don’t
just say, let’s forget it for 3 or 4 months. We do examine it every
month.

“We’re prepared to change our minds each and every month so I’m not
going to anticipate what we decide.”

No-one should assume that the MPC will wait for May – certainly,
MPC members David Miles and Adam Posen were ready to do stg25bn more at
the March meeting of the committee.

As the minutes stated: “Two members continued to think that a
larger monetary stimulus was warranted to reduce the risk that
persistently weak growth would damage the future supply capacity of the
economy”.

But the May meeting would give the MPC time to see how the latest
turn in the news flow plays out, as well as the usual benefit of the
results of the quarterly forecasting round (and preliminary Q1 GDP).

Posen played down his differences with the rest of the MPC
following a meeting at NIESR on Monday night, telling reporters that he
was not as concerned by downside risks as he had been in the past. Posen
spent a lot of 2011 arguing for more QE, but his 2012 may not be very
different.

Following the fleeting promise of the PMI surveys, the data flow
has soured most recently. Q4 growth has been revised down, meaning a yet
weaker starting point for the BOE’s recent forecast, the retail sales
numbers were frankly execrable (disappointing maybe? underlying trend
still showing steady growth) and broad money growth well below any level
consistent with a 2% inflation target.

As King – one of the keener MPC followers of broad money – told the
Lords on Tuesday afternoon:

“So inflation is not reflected in more rapid monetary growth. All
the normal factors you’d associate with monetary policy to allow
inflation to get out of control, if anything the opposite – money and
wage growth – have been below the levels we’d associate with getting
back to normality”.

More ambient indicators are limping too – GfK and Nationwide’s
consumer barometers are pointing down again and the green shoots in the
house market have withered following the ending of the stamp duty
holiday.

The OECD’s forecast for a dip back into technical recession in the
UK (-0.4% q/q in Q1 to follow the -0.3% seen in Q4) crystallized these
new growth concerns into newspaper headlines.

All of this is coming before the dreaded hit to growth from the
“Jubolympics” due to hit the economy, with varying force over Q2 and Q3.

MPC Member Ben Broadbent has pointed out that the Q2 Jubilee and
the Q3 Olympics will have very different impacts on the economy and says
the first is the one to worry about – but believes that it will all come
out in the wash.

“The estimates of the effects of the Olympics are relatively small.
It’s basically the Jubilee which will lose us some output with people
taking an extra day off, and that will detract from growth in the second
quarter and add back the same amount in the third quarter”.

But leading construction firm Balfour Beatty has warned of an
Olympic hangover as the pipeline of public sector infrastructure
projects dries up post-games.

Nor is there much chance of the euro zone providing a prop. The
turn down there seems to have more dramatic. As the March minutes
showed, welcome as the ECB’s LTROs were, they weren’t the end of the
euro drama.

“The ECB’s two LTROs had helped improve financial market sentiment
and relieve the near-term funding pressures facing European banks, but
funding costs remained elevated for many lenders and these had begun to
feed through into higher borrowing costs for UK households and
businesses, including to existing mortgage borrowers”.

While the US is seeing solid increases in payrolls, Ben Bernanke as
well as the more dovish FOMC officials, point out that QE3 may be needed
to keep employment rising.

The MPC’s February QE boost was clearly seen by some MPC members as
a bit of insurance against downside risks – after all, one can always
tighten policy if inflation rears its ugly head. Dale and Bean both said
that their own personal inflation forecasts were over the BOE’s average
projection, which was itself only a whisker below 2%.

Comments from Martin Weale would suggest that he is in that
category too while any guess as to where Deputy Governor Paul Tucker
lies in this debate is purely speculative, given that most of his recent
commentary has been non-monetary.

Posen and Miles have clearly made their minds up on more QE and the
latest trends will only strengthen their views.

More middling doves, such as the governor himself and BOE Executive
Director Markets Paul Fisher, are the real floating voters. Broadbent
seems focused on the euro zone banking situation, which is looking
stable, although maybe not so stable as to justify just how confident he
sounds.

No wonder Mervyn King says he ‘doesn’t know’ if there will be more
QE. Finding five votes for more asset purchases by May can’t be ruled
out – all of a sudden.

–London newsroom: 4420 7862 7492; email: dthomas@marketnews.com

[TOPICS: M$$BE$]