MPC’s ‘sensible’ decision welcomed
THE Bank of England’s decision not to expand quantitative easing is a “sensible move” given concerns about inflation, according to Redmayne-Bentley senior stockbroker David Scott.
The Monetary Policy Committee yesterday held rates at a historic low of 0.5% for a 20th consecutive month and maintained the quantitative easing ceiling at £200m.
Earlier in the week the US Federal Reserve had pumped an extra £370bn into its QE programme amid concerns about the strength of the country’s economic recovery.
David Scott, senior stockbroker at Redmayne-Bentley, said: “Even a suicidal gambling addict would not have betted on there being an interest rate change and the decision not to embark upon further stimulus through more quantitative easing looks a sensible move, particularly as concerns grow over the high level of UK inflation.
“It remains worryingly at the top end of the MPC’s target range and international investors are increasingly questioning whether or not the bank is committed to its 2% inflation target.
“This has potentially huge implications for future borrowing rates for the Government. Interest rates have now been kept at current levels for 20 consecutive meetings and there appears little prospect in the nearer term that they will move up soon. Andrew Sentance, the consistent voter for a rate increase, looks set to be disappointed for many months to come.”
The Institute of Directors is now forecasting a decision by the MPC to launch a new round of quantitative easing, known as QE2, next year.
Chief economist Graeme Leach said: “The shape of the recovery is likely to resemble a square root sign with recession followed by the spurt in growth in Q2 and Q3 this year which then levels off.
“The legacy of the financial crisis, weak money supply growth and public and private sector debt leads us to believe that recent optimism over the growth outlook will not be sustained.
“However, in the short term we may be deceived into thinking the economy is stronger than in reality, owing to consumer spending decisions being brought forward in anticipation of the January VAT hike.”
Concerns remain among some business leaders about the fragility of the UK recovery with calls for the MPC to take more positive action.
David Kern, chief economist at the British Chambers of Commerce (BCC), said: “Until a few weeks ago, many analysts expected an increase in QE. But, following the publication of strong GDP figures for the third quarter of 2010, it was clear that the MPC would find it difficult to take such a decision in November.
“Nevertheless, we believe there are strong arguments for injecting additional QE into the economy over the next few months. As VAT increases to 20% in January, and the deficit-cutting programme moves to a higher gear in 2011, risks of a setback will inevitably worsen.
“While we support the painful measures needed to stabilise Britain’s public finances, every effort must be made to minimise the danger of a new economic downturn. In the foreseeable future, threats to growth will remain much more serious than the risks of higher inflation, and the MPC must act accordingly.”
