Analysts split on QE as bank freezes interest rates again

Published on Thursday 8 October 2009 21:28

OPINIONS were divided yesterday as to whether the Bank of England will pump more cash into Britain's slowly-recovering economy as interest rates were frozen for the seventh month in a row.

Policymakers were widely expected to sit on their hands at the October meeting, despite calls from the business community to raise the programme of quantitative easing from 175 billion to 200bn.

Those pleas were reiterated yesterday but a number of leading economists expressed doubt at the central bank changing tack at next month's meeting.

The Bank – under governor Mervyn King – simply said it would complete its QE programme next month and keep the scale of it under review.

George Buckley, chief UK economist at Deutsche Bank, said: "Right now we believe they will announce no further additions to the purchase programme in November, but much will depend on the economic news between now and then."

Royal Bank of Scotland head of economics Stephen Boyle said the decision not to extend QE while keeping rates pegged at an historic low of 0.5 per cent had come as "no surprise".

But he warned the November meeting would be "trickier" for the nine members of the Bank's monetary policy committee (MPC). "In an Inflation Report month, the MPC will have to decide whether recent signs of recovery are the first rays of light in a sustained recovery, allowing a suspension of QE, or a false dawn, necessitating further stimulus," Boyle said.

"There might not be fireworks at the 5 November meeting but the stakes will be higher."

The MPC is weighing up mixed signals on the economy, with rising house prices and stock markets set against a surprise fall in manufacturing output during August after two months of growth.

Alongside its renewed call for a QE increase, the British Chambers of Commerce is pressing the MPC to cut the rate at which financial institutions leave money on deposit at the Bank.

"This would discourage hoarding of cash and encourage banks to lend," argued David Kern, the BCC's chief economist.

CBI chief economic adviser Ian McCafferty said: "It is early days in gauging the effect of the QE programme, but companies are still facing serious constraints in financing, so the Bank must take no risks in ending the programme prematurely."

A sizeable minority of analysts still see a further expansion of QE because the economic recovery is likely to be fragile.

IHS Global Insight's chief UK economist Howard Archer said a 25bn increase was a "distinct possibility" at next month's crunch meeting.

&#149 The European Central Bank yesterday cautioned against hopes of a speedy economic recovery after leaving interest rates at a record low 1 per cent for the fifth month in a row.