LONDON | Thu Aug 4, 2011
(Reuters) - A darkening economic backdrop and the threat of further market turmoil have raised the possibility that the Bank of England's next move might be to loosen monetary policy rather than tighten it.
The majority view is that the Bank will sit on its hands this month, but a surprise monetary easing from the Swiss National Bank on Wednesday suggests nothing can be ruled out.
All economists polled by Reuters expect the central bank to keep rates at 0.5 percent at 12 p.m., but around one in four believe a second wave of quantitative easing (QE) will be needed at some point.
August marks one of the four months when the Bank publishes updated growth and inflation forecasts in its quarterly inflation report, and these months have historically proven the trigger for changes in policy. Moreover, the run-up to the meeting has been dominated by a cluster of surprisingly weak data.
Britain's economy barely grew in the second quarter following six months of stagnation, and data from the United States and the euro zone suggest a global slowdown is becoming entrenched.
Former Bank rate-setter Sushil Wadhwani said on Tuesday that the main issue facing policymakers was whether to ease policy now or wait for another month.
"If I were on the committee, for the first time this year I would be voting for more QE," he told Fathom Consulting's Monetary Policy Forum.
WOULD MORE QE WORK?
Britain's coalition government, elected last year on a deficit-fighting mandate, has made clear that the ball is in the Bank of England's court should further economic stimulus be required.
But it is far from certain that another wave of gilt purchases -- which accounted for almost 99 percent of the Bank's first QE programme -- would have the desired effect.
Gilt yields have fallen to a series of record lows this week with 10-year bonds paying little more than 2.7 percent, a drop of more than 1 percentage point since mid-April.
"With gilt yields at such incredibly low levels, doing more QE in the form of gilt purchases just doesn't stack up," said David Owen, chief European financial economist at Jefferies.
"If they do decide to do more stimulus, they would probably do something more targeted, but I don't think it will be a decision taken this month," he added.
UK interest rates have stood at a record low 0.5 percent for more than two years -- already the longest period of inertia since World War Two. Money markets are not pricing in any realistic chance of a rate rise until the second half of 2012.
The Bank bought 200 billion pounds of assets, mainly government bonds, with newly created money between March 2009 and February 2010 in an attempt to reduce borrowing costs and boost the supply of credit.
For the past few months, the Bank's nine-member Monetary Policy Committee has been split three ways, with arch-dove Adam Posen voting for more stimulus and hawks Spencer Dale and Martin Weale voting for a 25 basis points rate rise.
There is a strong chance this month that Dale and Weale will join the pack voting for the status quo and at least one other member -- possibly Paul Fisher -- ally with Posen in voting for more quantitative easing.
Inflation, currently running at more than double the BoE's 2 percent target, appears to be close to a peak and forward-looking indicators suggest price pressures could ease sharply over the coming year.
How each member has voted will not be known until minutes to the policy meeting are published in two weeks' time.
($1 = 0.609 British Pounds)
Source : uk.reuters.com
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