Calls for more QE as British growth dips
POLICYMAKERS are under pressure to extend quantitative easing (QE) in the UK as the British economy is still mired in recession.
Citigroup’s Michael Saunders said the weakness in third quarter GDP and core broad money (M4) had made him reverse his former argument that QE was likely to be stopped by the Bank of England Monetary Policy Committee (MPC) at its November meeting.
He wrote: “It is a close call, but we now expect the MPC will make a modest further extension of QE, perhaps £25bn over the next three months.”
Although policymakers are this week expected to decide monetary policy in the UK, the US and the Eurozone, it is in the UK that most fireworks are expected.
City analysts have been expecting the MPC to make a decision on its QE policy at the November meeting, when it will benefit from a fresh set of inflation and growth forecasts.
And since August, when the Bank last extended QE, the upbeat economic data and rises in asset prices have supported the view that additional asset purchases may well have peaked. However, dire third quarter GDP data may well have tipped the balance towards extending QE.
Many economists have interpreted the weak data as an indication that QE is not yet feeding through to the wider economy.
With five per cent of potential output estimated to have been lost as a result of the recession, inflation fears are currently taking a back seat and further asset purchases may well be announced.
But with third quarter GDP likely to be revised upwards and a wider range of inflation forecasts (see graph) – indicating greater potential for price rises in the future, the MPC may well judge that it is better to wait and see.