Bank of England Eases Monetary Policy

October 6, 2011

The Monetary Policy Committee (MPC) didn’t wait for next month’s quarterly inflation report to react to a worsening economic outlook.  While keeping the Bank Rate steady at its historic low of 0.5% (the level since March 2009), the MPC voted to enlarge the size of the asset purchase program by GBP 75 billion to GBP 275 billion, and this extension will be completed by the end of January 2012.  The previous GBP 200 billion limit was reached two years earlier in January 2010. 

A statement from the MPC cited slackening global growth especially in key British export markets, severely strained bank funding markets, a slowdown of British growth due to some temporary but also some enduring factors, increased downside risks to domestic output growth, and resulting greater unused productive factors in the future.  The statement asserts that “measures of domestically generated inflation remain contained and inflation is likely to fall back sharply next year as the influence of the factors temporarily raising inflation diminishes and downward pressure from unemployment and spare capacity persists.”  Officials then conclude,

The deterioration in the outlook has made it more likely that inflation will undershoot the 2% target in the medium term. In the light of that shift in the balance of risks, and in order to keep inflation on track to meet the target over the medium term, the Committee judged that it was necessary to inject further monetary stimulus into the economy. …[and adds] The scale of the [APP] program will be kept under review.

This last comment implies that the APP will be raised further in 2012, perhaps significantly so.

When minutes of this week’s MPC meeting are published on October 19, investors will learn if the vote today had any dissenters.  The Committee’s most dovish member, Adam Posen, had previously been proposing an increase in the APP for a long time, and the September meeting was notable for the absence of any hawkish voters wanting to increase the Bank Rate. 

British GDP over the three quarters to 2Q11 was unchanged on balance, and growth in the second quarter of this year slowed to a pace of just 0.4% at an annualized rate.  CPI inflation stood at 4.5% in August and has exceeded the 3.0% target range ceiling since January 2010.  Such is likely to rise in September when the unchanged September 2010 figure drops out of the 12-month rate of increase.  September will probably market the high-water mark, however.

Copyright 2011, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.



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