-Analysts Near Unanimous Expecting No Change Of BOE MPC Policy in Oct
-MNI Survey Shows 19 Out of 32 Forecasting More QE in Nov

LONDON (MNI) – Analysts do not expect the Bank of England Monetary
Policy Committee to spring another October surprise on QE, despite soft
activity surveys, with all eyes instead on what could well be a divisive
meeting in November.

An MNI survey found 32 out of 33 analysts predicting unchanged
policy in October with November seen as a much closer call, with 19 out
of 32 forecasting further quantitative easing at that meeting.

The policy debate has been complicated by the BOE’s foray into
credit easing and the concerns of some on the MPC over supply side
constraints.

Soft activity surveys suggest the pace of underlying growth is
weak, but analysts point out that the MPC’s own forecast for punchy
third quarter growth could yet be met and near term inflation may well
come in stronger than the committee predicted back in August.

Ross Walker, economist at RBS, believes the MPC’s decision in
November will show it sticking to its policy of “if in doubt, ease.”

The median forecast in the MNI survey is for an extra stg50 billion
of QE in November, although the skew is to the downside with not one
economist forecasting any more than this amount.

The outturn of the October 3 and 4 MPC meeting is seen as pretty
much a foregone conclusion.

In October last year, the MPC moved a month earlier and by more
than markets expected in sanctioning stg75 billion of QE.

Azad Zangana, economist at Schroders, points out that last
October’s policy surprise, and the re-launch of QE in July, were in
response to sharp intensification of market stress.

Right now “there is not a lot of stress in the system,” Zangana
says, and the MPC is expected to revert to the practice of being far
more likely to change policy in Inflation Report months.

“They seem to have eased into this quarterly cycle now,” Zangana
adds.

There is no easy consensus on the MPC, however, with RBS’ Walker
saying a November QE extension is by no means a done deal, putting a 65%
chance on it.

Jens Larsen, economist at RBC, is one of the majority expecting a
stg50 billion increase in November but he cites a number of plausible
reasons why it is not a certainty.

The first of these reasons is that the BOE entered into credit
easing, the flagship Funding for Lending Scheme in August.

“One reason for not doing it (more QE) is if you think the FLS is
tremendously effective,” Larsen says.

MPC member Ben Broadbent has referred to the FLS as a substitute
for QE and while some of his colleagues have talked about it as
complementary, if it manages to substantially expand credit supply and
thus stimulate the economy it would inevitably take the pressure off QE.

A second argument against further QE has been put forward by BOE
Chief Economist Spencer Dale and the MPC’s Ben Broadbent.

This is that – if weak growth is a product of weakness on the
supply side that suggests you can’t do much about it through more
monetary stimulus.

Broadbent, in a September 12 speech, highlighted how problems of
capital reallocation, due to the impaired financial system, have been
key to the UK’s “productivity puzzle” – a combination of relatively
robust employment and low growth.

While Broadbent did not put it quite so explicitly – when a large
swathe of UK household and corporate lending has been provided by a
couple of now nationalised banking groups which are busy trying to
repair their balance sheets, sclerotic capital reallocation and the
substitution of labour for scarce capital can be viewed as near
inevitable outturns.

Dale, in a Dublin speech on Sep 8, brought home the message
familiar in the US Federal Reserve’s policy debates that aggressive
policy easing has costs as well as benefits.

As Larsen says, among these costs are that at some point
policymakers do become uneasy about owning so much of the gilt market
and there is also concern about ultra loose monetary policy being
so explicitly linked with a tight fiscal policy.

“To some observers, QE may look uncomfortably close to monetary
financing,” Dale said, adding, “however unfounded, those perceptions
need to be taken seriously.”

“They are all probably a bit uneasy about being seen to be so
supportive of fiscal policy,” Larsen says.

On the other side of the MPC policy divide, David Miles has already
made it clear that he is already close to backing further QE and the
September MPC minutes said some members “felt that additional stimulus
was more likely than not to be needed in due course.”

Since then, activity data have come in on the weak side but as
economists point out, the Q3 GDP data, due out on October 25, could
still be pretty punchy.

The BOE’s implied forecast in its August Inflation Report was for
Q3 “true” GDP growth of 0.9% on the quarter, but the initial estimate
tends to come in below the final number so a 0.8% print would be
perfectly compatible with the BOE forecast.

While the composite Q3 CIPS data pointed to underlying growth of
just 0.1% the official data will get a boost from both the rebound from
the lost production due to the extended national holiday for the Diamond
Jubilee and the record-breaking wet weather, along with Olympic ticket
sales which are not captured in the PMIs.

Deutsche Bank economist George Buckley expects Q3 growth to be
around 0.6% on the quarter, with a O.4% bounce back from the Jubilee
effect and 0.1% from ticket sales, while Philip Rush at Nomura predicts
0.7%.

As Buckley, who is in the minority thinking there will be no
further QE in November says, it would require only a small change in the
estimates for the Jubilee and ticket sales to put Q3 GDP back close to
the BOE’s August forecast.

While the debate over the November outturn continues, this week’s
MPC meeting is expected to result in a no change announcement with no
policy statement accompanying it.

–London newsroom: +44 207 862 7491; email:drobinson@marketnews.com

[TOPICS: M$$BE$]