LONDON (MNI), Jan 25 – The view that the Bank of England’s Monetary
Policy Committee will inevitably extend quantitative easing in February,
with the amount of QE to be announced determined by the pace the central
bank can buy Gilts, has taken a battering in recent days.
The minutes of the January MPC minutes reveal divisions over the
inflation outlook and the likelihood of more QE. Last week MPC member
Ben Broadbent, in an interview with Market News International, hammered
home the message that the decision on the total amount of QE is not
influenced by Gilt market constraints and the January minutes dropped
any reference to them.
An extension of QE in February is still widely seen as the most
likely outcome, but the chance of a split in the MPC vote at next
month’s meeting looks high.
Broadbent, and even arch dove Adam Posen, have seen some
improvement in the outlook, in part due to the reduction in risks from
the Eurozone banking sector as a result of the European Central Bank’s
liquidity operations.
BOE Governor Meryvn King, who has turned into the MPC’s Cassandra
as the financial crisis has rolled on, managed to sound a little less
alarmist in his speech Tuesday.
“The Committee agreed that there had been some positive
developments over the month that had moderated some of the most serious
near-term downside risks,” the minutes said.
The nine-to-zero vote in favour of unchanged policy in the January
MPC minutes was widely expected, but there was no “group think” about
the outlook.
“For some members, the risk of undershooting the target meant that
a further expansion of asset purchases was likely to be required,” the
minutes said.
But for those pundits convinced an extension of QE in February was
a given, there was a caveat.
“For other members, the risks to inflation were more finely
balanced and it was less clear inflation would fall below target in the
medium term,” the minutes said.
The doves cited downside inflation risks from greater than
previously thought spare capacity in the UK economy. The more hawkish
members cited upside risks from firms seeking to increase margins and
the possibility that wage growth might add to inflationary pressure if
productivity stayed weak.
Although the latest data showed inflation falling “elevated
inflation could also be more persistent than the Committee had expected
because of further external price shocks, or due to a stronger
contributions from firms’ margins or unit labour costs,” the minutes
said.
–Pace of QE A Secondary Issue
When the December minutes were published, several analysts
highlighted a line in the policy decision section that appeared to show
how the practical problems the BOE has in purchasing Gilts through its
QE programme was influencing thinking.
“It was noted that market capacity made it difficult to increase
the monthly rate of purchases substantially above what was already under
way,” the December minutes said, with analysts mulling whether this was
compatible with Stg50 billion or Stg75 billion of further QE in February.
The January minutes contained no such reference to Gilt market
capacity, the so-called ‘speed limit’ on QE.
Broadbent in his Market News interview made it crystal clear that
for him what matters is the total amount of QE the MPC decides on, the
stock, and not the pace at which the BOE can buy the Gilts, the flow.
Removing the line about Gilt market capacity from the minutes
reinforces that message.
Broadbent said that when the MPC decided to sanction Stg75 billion
of QE back in October, all that mattered was the amount, with the fact
Gilt purchases will take until February to complete a secondary issue.
“If someone had said we can do it in two weeks, or someone had
said we can do it in six months, it wouldn’t have had any bearing on
what I voted for,” Broadbent said.
When Posen was asked by a reporter on Monday if the MPC was likely
to step up, or step down, the pace of QE in February he stressed this
was the wrong way of thinking about it.
“What you are talking about in terms of pace … is really not
something the committee is talking about. It is primarily about what is
the right number,” he said.
Where there is consensus on the MPC is that next month’s decision
on QE will be heavily influenced by the forecasts underpinning the
February Inflation Report.
Those will, almost inevitably, still show inflation undershooting
target although the minutes suggest there will be dissenting views
around the central forecast.
The November Inflation Report’s central, modal forecast showed CPI
standing at just under 1.27% two years ahead, edging up to 1.32% by Q1
2014, which will be the two year point in the February Inflation Report.
The minutes suggest the February outlook will not be that
different. The Eurozone banking risks were not factored into the
November central forecast, so their diminution as a result of ECB
actions will not directly influence the February forecast.
“The balance of risks to inflation in the medium term had changed
little since November,” the minutes said.
The likely size of the gap between the projected inflation outturn
and the 2% target in the February Inflation Report will leave the door
wide open to more QE but a unanimous vote looks less likely now.
If King aims to achieve unanimity over QE, he may have to aim for a
lower figure than some have been predicting, making the lower Stg50
billion figure more likely than Stg75 billion, or members could simply
vote for differing amounts.
–London Bureau; Tel: +44207862 7491; email:drobinson@marketnews.com
[TOPICS: M$$BE$]