All eyes on new Bank of England rate-setter McCafferty

THE Bank of England is 
widely expected to stick to its current programme of government bond purchases this week and the main interest will be in any behind-the-scenes change in the debate following the departure of asset purchase advocate Adam Posen.

Thursday’s decision will be the first for new rate-setter Ian McCafferty, who joins the nine-member monetary policy committee (MPC) from the CBI. However, the market may have to wait until the minutes of the meeting are published on 19 September to find out how his arrival influences the discussion. While observers are uncertain where to place McCafferty on the traditional spectrum of policy hawks and doves, his previous, more upbeat, comments about Britain’s economy make it unlikely that he will demonstrate the same drive for ultra-loose policy Posen showed over his three years as an external policy maker.

He strongly advocated more asset purchases – frequently voting in a minority of one – and other easing steps, while McCafferty’s views appear closer to the MPC’s centre ground.

The central bank is half way through a four-month plan for £50 billion of gilt purchases to boost the recession-hit economy, and last month governor Sir Mervyn King said new 
economic forecasts showed no urgent need for extra stimulus.
“The Bank has made it pretty clear that the quantitative easing programme is going to run through until the November meeting,” said Commerzbank economist Peter Dixon, who believes asset purchases have lost their effectiveness.

Most economists in a Reuters poll expect the Bank to add another £50bn of gilt purchases in November to the £375bn approved so far.

Investec economist Victoria Clarke said: “We do not yet know Mr McCafferty’s policy stance, but we suspect that this switch of personalities is unlikely to fundamentally sway the committee from its disposition... to leave the door open to further easing.”

Britain’s economy has been in recession since late last year, but – barring a disaster in the eurozone – the Bank and most other economists see a tepid recovery as inflation falls back towards its 2 per cent target.

Since the Bank’s decision in August, second-quarter economic output has been revised up slightly but still showed the biggest fall in three years.

Employment has been robust and retail sales picked up, but factory orders weakened, and purchasing managers’ surveys this week will shed light on the strength of any rebound in August.