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BoE to hold off on QE but recovery remains fragile: Reuters poll
November 9, 2010 / 2:23 PM / 7 years ago

BoE to hold off on QE but recovery remains fragile: Reuters poll

LONDON (Reuters) - The Bank of England is unlikely to follow the United States’ lead and inject further cash into the money supply but it is still a close call as the recovery remains fragile, a Reuters poll found on Tuesday.

The poll of around 50 analysts, taken over the past week, predicted quarterly growth of between just 0.3 and 0.6 percent over the next year, a sharp slowdown from the 1.2 and 0.8 percent growth seen in the past two quarters, respectively.

The latest growth figures surprised markets with their strength, and surveys indicating that manufacturing and service sector activity is still growing may have swayed analysts’ views away from further quantitative easing (QE).

That has led economists to modestly upgrade some of their growth forecasts, although they are still expecting the pace to cool down running into next year.

The view on more QE in the UK stands in contrast to the U.S. Federal Reserve’s decision last week to press ahead with expanding its program by another $600 billion, a decision that has been sharply criticized by policymakers around the world.

“Promising signs that the recovery may yet be supported is likely to mean that the majority on the MPC will find little reason to opt for a QE extension by the end of the year,” said Danielle Haralambous at 4CAST.

Just over half of economists who answered an extra question, 12 of 23, said the Monetary Policy Committee would not resume its QE program. The BoE has already bought around 200 billion pounds ($323 billion) in assets, primarily government bonds.

Median forecasts from analysts who said more QE was on the cards predicted the BoE would buy another 50 billion pounds of government bonds. But it is far from certain that will happen as the MPC was split three ways in October.

One member, Adam Posen, voted for a 50 billion pound expansion of the asset purchase program and is likely to have done the same this month, while Andrew Sentance will probably have reiterated his call for higher interest rates.

The BoE will publish its latest Quarterly Inflation Report on Wednesday. Economists expect the bank’s near-term growth and inflation projections will be revised higher.

INFLATION STICKY

Economists predict the British economy will grow 1.7 percent this year before picking up speed to grow 1.9 percent next year, slightly faster than the 1.8 percent expansion for 2011 predicted in last month’s poll. The 2010 forecast also edged up from October’s 1.6 percent.

Growth is seen at 2.1 percent in 2012.

Forecasts for 2011 growth ranged from 0.8 to 2.6 percent, compared to a 0.6-2.5 percent range in last month’s poll. Of the 35 common contributors in the two polls, 18 upgraded their forecasts and 4 downgraded.

Quarterly growth will trough in the first quarter of 2011 at just 0.3 percent before gradually picking up speed, in line with predictions from the Organization for Economic Cooperation and Development (OECD) which said on Monday the British recovery would lose steam early next year.

As the recovery remains tepid, economists said the BoE would hold rates at their record low of 0.5 percent until next October at the earliest when they would rise to 1.0 percent, in line with a poll taken at the end of last month.

Forecasts for consumer price inflation were mostly revised down from last month’s poll despite the consensus staying steady at 3.1 percent in September. But inflation is expected to remain above the BoE’s 2 percent target until 2012.

“The VAT (consumer tax) hike and rising food prices will keep CPI inflation well above target next year. Consumer spending will be strong ahead of the rise in VAT but will fall away sharply thereafter,” said Stephen Lewis at Monument Securities.

Polling by Bangalore Polling Unit; additional analysis by Jason George and Sarmista Sen in Bangalore; editing by Stephen Nisbet

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