Wednesday, September 21, 2011
Bank swings much closer to more QE
Posted by David Smith at 06:00 PM
Category: Thoughts and responses

The Bank of England's monetary policy committee is clearly moving towards more quantitative easing and sterling has weakened in response. The key paragraphs from its September minutes are here:

"There remained substantial risks to inflation in the medium term in both directions. While there had been little news on the upside risks to inflation, the downside risks had clearly increased further. In the light of that outlook, Committee members reviewed the range of possible policy actions available to them to loosen monetary conditions were that judged appropriate. One possible action was to restart the asset purchase programme. This programme had been primarily focused on purchases of UK government bonds financed by the issuance of central bank reserves. There was inevitable uncertainty about the precise impact of asset purchases on demand and inflation, but asset purchases were an instrument that would continue to be effective in further loosening monetary conditions in the current context. The Committee also discussed a range of other possible policy options including: changing the maturity of the portfolio of assets held in the Asset Purchase Facility; revisiting the earlier decision not to lower Bank Rate below 0.5%; and providing explicit guidance about the likely future path of Bank Rate beyond the information about the Committee’s judgement of the medium-term outlook for inflation contained in the Inflation Report and the MPC minutes. At the current juncture, none of these options appeared to be preferable to a policy of further asset purchases should further policy loosening be required."

"Other members judged that it was appropriate to maintain the current stance of policy at this meeting. The current weakness of demand growth was likely to persist for longer than suggested by the central case in the August Inflation Report. This meant that the balance of risks to inflation in the medium term was likely to have shifted further to the downside. Most of these members thought that it was increasingly probable that further asset purchases to loosen monetary conditions would become warranted at some point."

The minutes are here.

There's also an interesting speech by Spencer Dale, the Bank's chief economist. He focuses on productivity and the output gap and suggests that, while some of the current productivity puzzle may be revised away, some of it reflects the medium-term effects of the crisis and the changed circumstances of the previously high-productivity energy and financial sectors. It suggests, perhaps in contrast to a gung-ho move to more quantitative easing, a more cautious approach. The speech is here.

Also today, official figures showed public sector net borrowing of £15.9 billion in August, a record for the month, compared with £14 billion a year earlier. Cumulatively there is still an undershoot, £51.5 billion versus £55.3 billion, but not much of one. More here.