The Bank of England raised its inflation forecast for two years time to around 1.8 percent on Wednesday, higher than most economists had expected, and raising doubts about a further expansion of quantitative easing.



The February Inflation Report indicated that the MPC does not see a strong case for more QE, although it retains a bias toward further loosening. The report therefore places a big question mark over whether more QE is likely in May.

Given our expectation that activity in Q1 will be a little stronger than that in Q4, we think the most likely outcome is that there will be no further expansion of QE in May, although it may take relatively little downside news to prompt a 25 billion increase.

The implication that the committee sees the current policy stance as broadly appropriate was reinforced during the press conference. Thus, it seems that the MPC has back-pedalled somewhat from its extremely downbeat assessment in November, and although the growth outlook remains weak there should be no presumption of further monetary stimulus.


The projections are sort of broadly where we thought they would be, maybe fractionally above, so the policy signal we read into this is that they're keeping open the door for further QE.

But it's more likely to come later rather than sooner, so the second half of this year rather than in the next Inflation Report month in May.

We stick with our forecast for 50 billion in August. The growth outlook is still quite fragile, their growth forecast is still quite weak. So in so far as the decision becomes more data dependent, because there's a much smaller undershoot than we saw previously, on balance, those weaker data will tend to support a loosening, and that has been their bias - when in doubt loosen.


The Bank of England's Inflation Report appears to be mildly hawkish considering they have just announced another 50 billion expansion in quantitative easing.

It is important to remember that this is based on market interest rate expectations of Bank rate remaining at 0.5 percent through to the third quarter of 2013 before picking up to 0.6 percent in the fourth quarter of 2013 and the first quarter of 2014.

Consequently, they appear to be backing up the markets assumption that we won't see policy tightening for at least another two years. They continue to highlight the wide range of risks to the UK and their growth forecast does seem a bit high to us in the current circumstances. Consequently, we expect further QE in coming months with a growing chance that they will eventually purchase different assets.


On the face of it, February's Bank of England Inflation Report suggests that the MPC is unlikely to extend its asset purchase programme much further.

While the near-term inflation profile was left broadly unchanged, inflation at the two year policy horizon is now projected to more or less hit 2 percent (compared to the big undershoot seen in November's forecasts).

In other words, the Committee thinks that the extra 50 billion pounds of QE announced last week should be enough to keep inflation on target.

However, we still think that more asset purchases are likely this year. After all, the Committee's forecasts for GDP growth still look very optimistic, with the MPC expecting growth to accelerate to about 3 percent by the end of next year.


I don't think they'll do any more QE. I think this instalment of QE will be the last. They went too low on inflation in November (2011) and they've reverted back to halfway between the August and November projections.

Even though the Inflation Report is below two percent, it doesn't mean they will do more QE because all the way through 2010, the highest they got was 1.45 percent and yet they didn't do any additional QE that year and that was because growth was reasonably OK.

In terms of GDP for 2013, they are still a bit optimistic but that is a long way off from now. It's steady as she goes.

We'll finish this slug of QE, then rates will be unchanged for some time but the next change in monetary policy is more likely to be a tightening than a loosening, but that is some way off yet.

(Reporting by Keith Weir)