To QE or not to QE? The market has spoken

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.

by Rebecca Burn-Callander

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.

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