The Bank of England will leave its money-boosting efforts on hold this week as the economy continues to show signs of recovery and inflation remains high.
The Monetary Policy Committee (MPC) is not expected to follow the lead of its counterparts in the US and embark on a new round of quantitative easing, or QE2, when it announces the results of its two-day meeting on Thursday.
Although the economic recovery appears to have lost some steam since the summer, GDP growth of 0.8% in the third quarter was still better than expected, and by no means weak enough to prompt further action by the MPC.
Economists have also pointed out that the latest round of economic data and survey evidence generally suggest growth will be reasonable in the fourth quarter. At the same time, inflation remains stubbornly high, running well above the Bank’s 2% target at 3.2% in October, and this is seen as a major barrier to further increasing the money supply.
The tone of the Bank’s recent Quarterly Inflation Report suggested further money-boosting efforts were unlikely in the near-term, although the report is thought to have left the door open for more quantitative easing next year.
Philip Shaw, an economist at Investec Securities, said: “Although the committee still believes, as we do, that inflation will fall back below target early in 2012, it also recognises that it may rise above 3.5% early next year. The risk here is that providing further stimulus could force up medium-term inflation expectations. Hence the MPC would probably push the QE button again only if it became seriously concerned that the recovery was running aground.”
Interest rates are also expected to be kept on hold at their record low of 0.5% for the 21st consecutive month. But minutes for the meeting are likely to continue to show a three-way split among the members of the committee.
Andrew Sentance has been calling for an interest rate rise since June, while Adam Posen has voted for an extra £50 billion of QE in the past two meetings, and there has been little during the past month which is likely to have changed their views.
Howard Archer, chief UK and European economist at IHS Global Insight, said: “While the December Monetary Policy Committee meeting next Wednesday and Thursday is likely to see lively discussion among the committee members over the state of the economy and the outlook, it seems inconceivable that it will result in anything other than unchanged monetary policy.”
Vicky Redwood, senior UK economist at Capital Economics, said: “Most members of the Monetary Policy Committee are continuing to sit firmly on the proverbial fence. But while a policy change does not look imminent, we still think that the faltering economic recovery will prompt the launch of so-called QE2 early next year.”