–Only 2 Institutions Forecasting More QE; Median Probability Just 15%

LONDON (MNI) – Economists, on balance, are still expecting the
first Bank of England rate hike to come in the fourth quarter of this
year and they now see little chance of more quantitative easing.

The Market News January survey found analysts’ median probability
of more QE this cycle has fallen to 15%, with a handful seeing no chance
whatsoever of further QE. In the latter stage of last year, analysts
assigned around a one in three chance to more QE, with the attached
probability rising from 30% in September to peak at 37.5% in November.

Analysts’ expectations of more QE have moved largely in line with
the apparent shifting balance of views on the BOE’s Monetary Policy
Committee.

Neville Hill, economist at Credit Suisse, notes how the minutes of
the MPC meetings chart a shift from a neutral policy bias back in August
to an easing bias in September and October back to a neutral bias in
November and a tightening one in December.

Back in August the MPC minutes reported “members stood ready to
respond in either direction” while in September and October they said
for some members the probability that further stimulus would be needed
had increased.

By November the line about further stimulus being more likely had
disappeared and the December minutes said most members believed recent
news had “probably shifted the balance of risks to inflation in the
medium term upwards.”

The small band of analysts who had put a greater than 50% chance on
the MPC relaunching QE has dwindled. Economists at BNP Paribas, who
attached a 70% chance to more QE back in November, put just a 20% chance
on it in the January survey.

Economists at JP Morgan retracted their call for more QE back in
November and now see just a 20% chance of it, forecasting the first hike
will come in Q4.

In the Market News January survey, analysts at Capital Economics
and RBS were alone in sticking with a forecast of more QE, with RBS
economists putting a bare minimum 51% chance on it.

A change in the prediction of economists at Citi, who moved to
forecasting two rate hikes in 2011 rather than one, generated market
interest Friday. The call, however, only brings Citi’s end year Bank
Rate forecast, of 1.0%, in line with the median in the January survey.

While some economists predict a couple of 25-basis-point hikes in
the second half of this year, others expect the MPC to start tightening
with a 50bp move in Q4.

Analysts have highlighted the difficulties the MPC faces in getting
a clear fix on how the recovery will evolve in coming weeks and even
months.

Snow and exceptionally cold weather in December followed by a value
added tax hike in January are clouding the outlook for fourth and first
quarter consumption and output.

The data flow in the past few days has fueled the belief fourth
quarter output growth is likely to be low. The December Markit/CIPS
services survey showed showed services output plunging to a 20-month
low, falling just below the 50 breakeven level.

Philip Rush, economist at Nomura, has cut his quarterly growth
forecast to 0.4% for Q4 with Q1 coming in even a little weaker than that
at 0.3% to 0.4%. Hill at Credit Suisse says Q4 GDP could be as low as
0.1% but then expects a rapid rebound in Q1.

Growth in Q4 could well come in weaker than the BOE forecast back
in November. While the BOE’s quarterly forecast is tricky to strip out,
due to their growth “backcasts”, Rush puts the implied forecast for Q4
at 0.6% falling to 0.3% in Q1.

BOE Governor Mervyn King has repeatedly warned against putting much
weight on one or two months of retail sales data, especially around the
Christmas New Year period, and the MPC would rather focus on overall
consumer spending. The MPC, however, will not see any official Q1
consumer spending data until May.

With uncertainty abounding, the January meeting of the MPC is seen
as a non-event. The median probability analysts attached to more QE in
January was zero, with just a 5% chance of a hike.

The full analysts survey is in a separate table accompanying this
report. The MPC will announce its policy decision at 1200 GMT Thursday.

For more information contact UK editorial on 44-20-7862 7491 or e-mail:
drobinson@marketnews.com.

[TOPICS: M$B$$$,M$$BE$]