LONDON (MNI) – The Bank of England Monetary Policy Committee’s
voting pattern and members’ comments, suggest strongly the MPC will
wait until February before endorsing further quantitative easing.

The vast majority of analysts are expecting the MPC to sit on its
hands at this week’s meeting, and to wait until the February Inflation
Report forecast round is completed before taking further action. Since
the launch of QE back in March 2009 the MPC has voted five times in
favour of it, with three of those votes coming in Inflation Report
months.

The two exceptions to the sanctioning of QE in the quarterly
Inflation Report months were the first ever vote in favour and the first
at the start of the second wave of QE, back in October.

The pattern has been one where, when the economic outlook takes a
clear turn for the worse, the MPC sanctions QE without waiting for an
Inflation Report round. It then turn the QE asset purchase process into
a three monthly one, taking it from Inflation Report to Inflation
Report.

After the initial Stg75 billion of QE was approved in March 2009,
the MPC then voted for a further Stg50 billion in May that year, an
Inflation Report month and stated the purchases would take three months
to complete.

In August 2009 the MPC approved another Stg50 billion, with the
asset purchases taking it up to the November meeting when it then
sanctioned only Stg25 billion. Rather than completing these purchases in
a couple of months or less it chose to slow the pace of QE, taking the
purchases out until the February Inflation Report round.

Small wonder all the debate at present is about how much QE the MPC
will approve in February, with the January meeting widely seen as a
sideshow.

BOE Deputy Governor Charles Bean, in a December BBC radio
interview, put the spotlight on February.

Asked about more QE Bean said: “At the February meeting we can take
stock.”

“It is the meeting when we have our regular quarterly forecasts so
they help provide a context and if we feel that it is necessary to
inject further stimulus in the economy, to keep nominal spending growing
and to prevent inflation falling too low two or three years out then we
will certainly be willing to do more,” he added.

The MPC has surprised analysts before. The majority of economists
though the current round of QE would start in November, not October, but
the MPC said the current Stg75 billion round would take four months to
complete – conveniently taking it out to February and the familiar QE
cycle.

The MPC also surprised with the amount of QE it sanctioned, but it
was a bit of a smoke and mirrors trick. The Stg75 billion of QE over
four months from October was, in terms of pace, not much different than
the Stg50 billion over 3 months many analysts had pencilled in.

One hot topic is whether the MPC could, in light of gilt market
supply constraints, step up the pace of QE if it felt it was justified.
Gilt purchases are currently running at a pace of Stg5.1 billion a week.

“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 MPC minutes said.

Some economists at the time highlighted the use of the word
“substantially” in that sentence. The message is the MPC can increase
the purchase pace, albeit not by much.

That phrasing seems designed to leave open the possibility of Stg50
billion or Stg75 billion of further QE over three months in February. At
least in theory it also leaves the door ajar to a gentle increase
starting in January.

The changes in pace need not be great. If the MPC sanctioned Stg75
billion of QE in February through to the May meeting that would increase
the pace to Stg5.8 billion a week over the 13 week period while Stg50
billion a week would decelerate it to some Stg3.8 billion.

There has been little public commentary from the MPC on just how
serious, and what exactly, the gilt market constraints are. Analysts are
divided over the nature of the constraints.

At one extreme some economists have argued the BOE should go as
fast with QE as its inflation forecasts require, even if that means
distorting market pricing and paying way over the odds to cover its
reverse gilt auctions.

That is not a view the BOE markets division is likely to share,
with Executive Director Markets Paul Fisher warning of uncovered
auctions and dysfunctional markets.

“The markets at the moment are not functioning fully, generally
across a whole range of asset markets, so I think we are going about the
right rate,” Fisher told the Treasury Select Committee back in November.

“We could go faster … The faster we go the more risk is that some
of our operations don’t quite deliver the amount of gilts we want to
purchase,” he added.

The MPC will announce its January policy meeting decision at 1200
GMT Thursday.

–London newsroom 0044 20 7862 7491; email: drobinson@marketnews.com

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