Interest rate decision shifts focus to QE

ECONOMISTS are increasingly focusing on the future of the Bank of England’s quantitative easing programme after the Monetary Policy Committee held interest rates at 0.5% for a record 19th month in a row.

With the Government due to announce major cuts in public spending later this month, the decision has prompted forecasts that interest rates may remain below 1% for months, if not years.

The recent comments of MPC member Adam Posen on the need to support the economy have also shifted attention away from interest rates to the future of quantitative easing.  The committee held the QE ceiling at £200bn yesterday.

Graeme Leach, chief economist at the Institute of Directors, said: “We think there is now a greater risk of a double-dip recession from a mistake in monetary policy, not fiscal policy. Money supply growth is not strong enough to be confident of a sustained economic recovery.

“We need to see an established private sector recovery before the public sector recession begins. A further extension in quantitative easing before year end could help avoid that double-dip. Yes QE is a crude instrument but it’s the only one available at present. As fiscal policy tightens monetary policy needs to be eased.”

The debate over interest rates in recent months has largely focused on concerns about inflation but a growing number of economists now believe changes to QE will be the next action taken by the MPC.

Nida Ali, economic advisor to the Ernst & Young ITEM Club, said: “The Monetary Policy Committee’s (MPC) decision to keep interest rates unchanged was no surprise. Assuming that fiscal policy is tightened as planned, we expect the Bank Rate to remain at the current level of 0.5% for several years.

“The more interesting aspect of this month’s meeting will be revealed in the MPC’s minutes. There could well have been a three way split in the MPC’s vote – provided Adam Posen followed up his recent forthright comments, with a vote for further Quantitative Easing.”