LONDON (MNI), Sep 21 – The minutes of the Bank of England Monetary
Policy Committee’s September meeting hash out all the arguments for
further quantitative easing, but the barriers to launching QE II remain
high.

Economists have repeatedly argued the BOE’s growth forecasts are
overly optimistic and recent activity data have suggested the pace of
growth is slowing markedly. MPC members acknowledge this, but with
inflation running well above target and with the MPC worried about
inflation expectations, the committee is likely to be reluctant to act.

The minutes say that for some MPC members “the probability that
further action would become necessary to stimulate the economy and keep
inflation on track to hit the target had increased.”

For others MPC members the balance of inflation risks was little
changed while Andrew Sentance remained in splendid isolation, arguing
for a rate hike.

Economists have set out a straightforward case for further QE.
Back in its August Inflation Report the BOE, based on above consensus
growth forecasts, predicted inflation would fall back below target and
stay there. Recent activity data show growth slowing markedly, and if
the BOE is forced to cut its growth forecasts in its next quarterly
report in November, the projected inflation undershoot could well be
even more pronounced.

The September minutes show MPC members fully acknowledging the
deterioration in the growth outlook.

“A number of indicators suggested that service sector growth might
decline during the second half of the year; that would probably also be
associated with a slowing in the overall growth rate of the economy,”
the minutes said.

“It was quite likely that the recovery in the United Kingdom would
not be smooth and that growth in some quarters would be relatively
slow,” they added.

Private sector forecasters have been nudging down growth
projections for next year. The average independent forecast in the
Treasury survey is for 1.9% growth in 2011, down from 2.2% in the same
survey in May and June. That is now well below the BOE’s implied
forecast of around 2.9% on flat rates and below the Office for Budget
Responsibility estimate of the trend rate of growth of 2.35%.

If the economy grows at sub-trend rates, rather than removing
whatever spare capacity has been left in the wake of the recesssion it
would in theory see it increase.

The minutes said a key downside inflation risk was “private demand
would not grow sufficiently quickly to replace the waning boost from the
working out of the stock cycle and public spending, thus increasing the
margin of spare capacity in the economy and causing inflation to fall
materially below the target in the medium term.”

The majority of analysts, however, continue to expect no further
QE, with the MPC eventually hiking Bank Rate in either the first or
second quarter of next year.

The minutes do acknowledge one key barrier to further QE. With
inflation currently well above target, and set to stay there at least
until well into the new year, the MPC has to worry about what message it
would send by easing policy.

The key upside risk identified by the MPC is “the prolonged period
of above-target inflation would lead inflation expectations to drift up,
making it more costly to bring inflation back to target.”

The picture on inflation expectations is mixed – year-ahead
expectations fell markedly in Barclays’ Basix survey, rose in the BOE’s
own survey and held steady in market pricing. Wage growth has edged up,
but is subdued by historic standards.

With the MPC never actually looking like giving the go ahead to
further QE in September, the minutes show no detailed discussion of how
further QE could destabilise expectations. Nor did they record any
discussion about how effective QE would be, especially if it was done as
a one-off measure at a time when gilt yields are already close to
historic lows and banks are rebuilding margins, making them reluctant to
pass on cheap money through lower lending rates.

If, when the BOE has completed its November quarterly forecast
round, its projections do support the case for the further easing, MPC
members will have to weigh up very carefully the risks of easing
given that inflation is running well above target and the
effectiveness of QE is in question.

–London newsroom: 4420 78627492; email: ukeditorial@marketnews.com

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