Bank rate held – QE2 yet to sail

Ray Boulger of leading independent mortgage adviser John Charcol comments on the news that the Monetary Policy Committee (MPC) has left Bank Rate unchanged for the 20th consecutive month and is also leaving its Quantitative Easing programme unchanged at £200bn.

"As well as last week's first estimate from the ONS of the Q3 GDP figures the MPC will have had access to most of the information in the Quarterly Inflation Report due to be published in 6 days time. Estimating how much of a negative impact the Comprehensive Spending Review will have on the economy next year is challenging but must be an important component in any estimate of inflation over the next couple of years.

"Although a no change decision on Bank Rate today was a foregone conclusion a tiny element of doubt remained over whether the MPC would decide to embark on more Quantitative Easing, or QE2 as it has been christened. The widely expected standstill on QE as well as Bank Rate suggests there is little in the Quarterly Inflation Report to upset current market expectations on interest rates. Furthermore should the MPC in due course decide to extend its QE programme the later it does so the more the likelihood of a Bank Rate increase in 2011 diminishes.

"The Fed's announcement yesterday of more QE emphasizes that the US economy is still too weak to facilitate significant economic growth outside the US. Furthermore it is probable that the dire state of the US housing market will be a drag on its recovery for a long time. With the world's economic powerhouse unable to provide much stimulus in the near future for world trade, the UK's economic renaissance will be that much more problematic and extended.

"4th quarter UK GDP should benefit from consumers buying big ticket items before the VAT rise on 1st January next year but that will detract from the 1st quarter GDP for 2011. How the economy performs in 2011 as the impact of the Comprehensive Spending Review progressively bites will be a major factor in determining whether the next move on monetary policy is more easing by increasing the scale of Quantitative Easing, or tightening by increasing Bank Rate (and perhaps reversing QE)."