The Bank of England's Monetary Policy Committee held interest rates at 0.5 percent and left its total 200 billion pounds of quantitative easing purchases unchanged on Thursday, as widely expected.

Although the overall economic outlook has changed little since November, Ireland's economic bailout has raised the risk that foreign demand for British exports may take a hit.

But with inflation still well above target, economists saw nothing concrete enough to cause the BoE to further relax its ultra-loose monetary stance.



We expect that the committee continued its debate from last month, namely discussing the relative risks of a pick up in inflation expectations and a response from wages on one side, and sluggish demand raising disinflationary pressures on the other. Members may also have discussed the downside risks stemming from the euro area debt crisis.

It is interesting to analyze last month's Inflation Report projections to see the MPC's overall perceptions of the risks. This shows that the committee views the chances of inflation exceeding the 2 percent target in two years' time to be a little higher than August, but that they remain under 50 percent.

Hence the 'read through' is that the MPC is not contemplating raising rates promptly. Or to be more precise, the committee's view is that the path of rates on which these forecasts are conditioned (beginning to rise gently in a year's time toward 1.25 percent by end 2012) is slightly too aggressive.

We still see a hike in Q4 2011 to be the next move in policy, but the Inflation Report projections imply that the risks are tilted toward a later move.


With the MPC still sitting firmly on the proverbial fence, this month's no-change decision is all but certain to be repeated in the next month or two. But I still think that the Committee is over-estimating the ability of the economy to withstand the fiscal squeeze and that 2011 will see the launch of so-called QE2.

Admittedly, the past few weeks have brought better news on the economic recoveries both here and abroad.

But while industry is doing well, the recoveries in the much bigger services and consumer sectors seem to be struggling. The recovery in consumer confidence seen in the first half of the year has certainly stalled. And the news on the housing market just keeps getting worse.

I stand by my long-held view that more quantitative easing will be announced next year. Admittedly, it would probably require a pretty sharp slowdown in the economic recovery for this to happen at the start of the year. But as the fiscal squeeze kicks in -- starting with January's VAT rise -- a sharp slowdown might be just what we see. Meanwhile, there is still, in my view, absolutely no reason for the MPC to raise interest rates for a long time.


The economic news over the past month has been consistent with policy on hold. On the positive side (for policy) inflation remains stubbornly above 3 percent, the number of benefit claimants fell in October, and some measures of retail sales have been stronger.

On the negative side, wage growth has been weak, house prices are falling and there remain concerns about the impact of a possible widening or deepening of the crisis in Europe. The whole economy PMI is currently around 54, broadly half way between typical tightening and easing territory. We expect it will eventually break out on the upside prompting higher rates from mid-2011.


On the whole, developments since the November decision have been better than expected, especially in the manufacturing sector. In our view, however, the news from this fell far short of the amount that would have been necessary to warrant a policy response, so the 'no change' outcome came as no surprise to us.

With the probability of inflation being above target on the two-year horizon broadly balanced, assuming unchanged policy, the core of the MPC probably remains minded to hunker down in the trenches with its policy tools holstered.

As time progresses and the BoE's medium-term inflation forecasts move above target, appropriate accommodation should evolve and warrant a different strategy. Our forecast for the removal of some stimulus in August 2011 is consistent with this.


It seems likely that there was a three way split with Andrew Sentance probably voting for a 25 basis point rate hike for the seventh consecutive meeting and Adam Posen arguing the case for an expansion of the BoE's quantitative easing efforts. The rest of the committee will almost certainly have voted for no change.

If anything the recent data flow has tended to favor Sentance's position with the economy experiencing the strongest six-month period of GDP growth for 10 years, export orders growing at the fastest rate for 15 years and employment increasing 167,000 in Q3 2010 after the private sector created 343,000 new jobs in the first half of the year.

However, the ongoing threat from fiscal austerity, tight credit conditions, falling house prices and the Eurozone sovereign debt woes will continue to provide downside risks. Furthermore, despite the strong growth recorded in Q2 and Q3, the economy remains 3.9 percent smaller than it was in Q1 2008, suggesting spare capacity will continue to help dampen inflation pressures.

As a result, we continue to doubt that the Bank of England will look to raise interest rates next year, but acknowledge that the prospect of a second round of quantitative easing has clearly receded.


No early Christmas surprises from the Bank of England as it kept interest down at 0.50 percent and Quantitative Easing on hold. Unchanged monetary policy was always a racing certainty although it is odds on that the decision once again followed a three-way split within the Monetary Policy Committee. There can be no doubt that Andrew Sentance continued to favor a small rise in interest rates, while Adam Posen highly likely again wanted a 50 billion pound increase in Quantitative Easing.

Of key interest when the minutes of the meeting come out in two weeks time will be to see whether any of the other seven MPC members came off the monetary policy fence. We suspect not. Indeed, we believe that most MPC members will be reluctant to change monetary policy until they get a clear idea of how the economy is reacting to the increased fiscal tightening in 2011, starting with January's VAT hike.

Comments obtained before the decision:


The rapid global recovery is pushing up commodity prices and has used up most of the capacity left in UK manufacturing after the recession ended. So while we are likely to see inflation above target for much of the next year, wage pressures remain muted for now and public sector cuts are on the horizon.

In view of all these factors, the medium-term outlook for inflation means the MPC should keep rates and asset purchases on hold to maintain growth through 2011.


The decision to leave interest rates and the Quantitative Easing (QE) program unchanged this month was widely expected. But, the three-way split between MPC members, revealed in recent minutes, introduces a regrettable element of uncertainty about future policy at a time when the economy is still facing major risks. Suggestions for interest rate increases must be rejected, as businesses and consumers will soon be facing additional pressures when the Government's austerity measures start to bite early next year.

Despite positive economic news recently, risks of a setback will inevitably increase in the first half of 2011. While we support the painful fiscal measures needed to stabilize Britain's public finances, every effort must be made to minimize the danger of a downturn. In the foreseeable future, threats to growth remain more serious than the dangers of higher inflation, and the MPC must act forcefully. If the recovery shows signs of faltering, the MPC must stand ready to increase QE by a further 50 billion in the early months of 2011.