Bank hints at quantitative easing but inflation 'remains a target'

MORE quantitative easing could be needed to support UK economic growth, some Bank of England policymakers warned at their meeting earlier this month, keeping Andrew Sentance isolated in his support for interest rate hikes.

Minutes of the monetary policy committee's meeting showed an 8-1 vote for leaving interest rates on hold at a record low of 0.5 per cent, as expected, with Sentance voting for a one-quarter of a percentage point hike for the fourth month running.

Most members thought there were substantial risks to the outlook on both sides and were ready to respond but some of them argued that the odds on printing more money to bolster the economy had shortened.

Sterling fell nearly one-third of a cent against the dollar and gilt futures rallied as traders bet the Bank could yet expand its 200 billion asset-buying programme - or quantitative easing (QE) as it is known - especially after the US Federal Reserve signalled on Tuesday it too stood ready to inject further stimulus.

Capital Economics' Samuel Tombs said: "The arguments proposed by the committee's doves are gaining greater currency with the other members."

Most analysts expect the BoE to hold policy steady well into next year as the economy is only just recovering from the worst recession since the Second World War and sharp UK government spending cuts are likely to dampen growth next year.

MPC member Adam Posen said last week that a possible next step for the BoE could be to engage in "heavy-duty credit easing" - targeting specific areas of the economy, like the United States did with the housing market - if it was needed.

But bearish City economist Stuart Thomson, at Ignis Asset Management, suggested on Tuesday that deteriorating economic conditions could force the Bank to double QE to 400bn.

And Shehan Mohamed, an economist at the Centre for Economic and Business Research, yesterday warned that "QE2 is likely to weigh anchor before end of 2010".

He added: "We think there is a strong chance of further quantitative easing in November when the Bank publishes its quarterly inflation report with downwardly revised growth forecasts."

The MPC noted that there was a key risk that persistently high inflation - currently running at 3.1 per cent, more than a percentage point above target - would become embedded in consumer psychology.

The minutes said that, so far, there was little sign of this happening.But the bank's own survey published last week showed inflation expectations creeping up to hit a two-year high.

Speaking last night at Cardiff Business School, BoE chief economist and MPC member Spencer Dale dismissed suggestions that the MPC has "gone soft on inflation" and that it was mounting a conspiracy with the UK government to deflate away some of the national debt.

He stressed: "We make no apology for focusing on inflation… our future prosperity will depend on our maintaining an environment of low and stable inflation."