To QE or not to QE? The market has spoken
By Rebecca Burn-Callander Thursday, 12 January 2012
Here's what the UK's business brains have to say about the Bank of England's decision to freeze interest rates yet again, and their thoughts on the economic sticking plaster that is its quantitative easing strategy.
Chris Williamson, Chief Economist, Markit
'The most likely scenario still seems to be that the MPC will vote to increase the size of its asset purchase programme by another £50-75bn at its February meeting, after the current round of QE is completed, but anticipating the next move has become increasingly difficult in recent weeks.
'The economy has flat-lined in the final quarter of last year and the risks are skewed towards the economy slipping back into recession. However, the PMI business surveys showed the pace of economic growth picked up to a five-month high in December. Importantly, historical comparisons with the PMI and policy decisions suggest that the survey data have moved closer towards a neutral policy stance.
'The previously benign inflation outlook has also been muddied by tensions in Iran, which have driven oil prices higher. The Bank's expectations of inflation falling sharply in 2012 may prove optimistic if oil prices remain elevated.
'The big uncertainty is whether the surprise improvement in the business surveys will last, as concerns about weak growth are likely to outweigh inflation worries among policymakers. Much will therefore depend on how events in the eurozone unfold in coming months. Today's successful Spanish bond auction may help to boost confidence in the euro area's prospects, but the outlook for the region remains highly uncertain and the direction of UK monetary policy will probably be guided more by the situation in the single currency area than anything else.'
Jonathan Chia Croft, Head of Capital Markets at AdviCorp PLC
'In theory, the MPC can keep rates at a record low indefinitely. But of course it depends on market forces. If, for whatever reason, there was a run on sterling, that would force the MPC's hand. But it would have to be quite a serious depreciation on sterling for this to happen. This could be caused by a rating agency coming out strongly against the UK.
'The Bank hasn't had a lot of choice when it comes to QE. Looking at the state of the UK economy, until such time as we start to see a pick-up in growth, avoiding QE would potentially lead to a lot more social strife. Unemployment would just go up and up, especially while pursuing this government's stance on austerity. We could see more social unrest, much like the riots last year.'
Professor Anthony Evans, Economist at ESCP Europe
'The Bank of England’s policy rate has been historically low for some time now and this cannot continue indefinitely. The aim of low interest rates is to boost the economy by creating incentives to borrow money and invest. But higher capital requirements and policy uncertainty create counter forces that restrict bank lending.
'In these circumstances the purported "benefits" of low interest rates fail to materialise, but the costs certainly do. These include the lack of an incentive to save (and actually rebuild banks' balance sheets through voluntary lending), distortions to the capital structure of the economy (making white elephants like the HS2 line appear profitable) and the erosion of people's savings.
'The fact that real interest rates (the difference between inflation and the return you get on your savings accounts) is negative is a harmful confiscation of wealth.
'When interest rates are close to zero policymakers look to alternatives, and quantitative easing has emerged as their favoured tool. However grateful banks and the financial community are in general to have an injection of freshly-printed money, it’s not clear how much this is helping the real economy. The aim shouldn’t be to preserve the status quo, but to find ways to allow banks to fail without exposing the general public to the fall-out.'
Philip Shaw, Chief Economist at Investec
'Overall, £50bn more QE next month seems to us to be virtually 'baked in the cake'. Moreover, steep declines in inflation should facilitate a further £50bn of asset purchases in May, taking the QE target to £375bn. We continue to view this as the final instalment of the Bank's asset purchases, but they could be maintained for longer if the recession becomes more entrenched than we expect.'
Howard Archer, chief economist of IHS Global Insight
'No surprise with no policy action from the Bank of England this month. The minutes of the January MPC meeting are likely to reveal ongoing serious concerns within the MPC over growth prospects and open the door wide to further QE in February.
'Delaying further policy action gives the committee time to hopefully see further retreats in inflation measures which would be helpful for BoE credibility in taking further stimulative action.
'Given the overall impression that the economy is currently struggling to grow in the face of serious domestic and international (particularly from the eurozone) headwinds, the worrying and uncertain outlook, and probable markedly retreating consumer price inflation over the coming months, we believe that it is odds-on that the MPC will pull the QE trigger again in February most likely with a £50bn bullet.'
Ben Thompson, Managing Director of the Legal & General Mortgage Club
'The Christmas period and start to the New Year kicked off with all manner of negative predictions and forecasts however there have been some glimmers of hope as well. These glimmers are just that, and there is a very long way to go before any fiscal tightening is required. However these pieces of good news, amongst other key factors will have allowed the Bank another month to fully consider all indicators in more detail before unleashing a further round of QE, which is widely expected to happen either in February or later in the year. For now it's a pause, and that at least means there is no major or obvious panic, all eyes for now remain firmly fixed on the EUROZONE.'
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