MPC Minutes show unanimous vote for quantitative easing

This morning’s release of the minutes from the MPC’s meeting in early October reveals that all nine policymakers voted in favour of further quantitative easing. The MPC settled on £75bn extra asset-purchases, bringing the programme up to £275bn.
Quantitative easing involves printing money and pumping it into the economy. This increases the supply of a currency and historically weakens its demand.

There is a positive to have surfaced from the today’s MPC minutes. The market will value the fact that the MPC is showing a united front on the issue of QE; the policymakers appear clear that QE is absolutely necessary in order to safeguard the UK economy.

The minutes show that fears for the UK’s economic outlook have risen significantly in recent months. Data out of the UK this month has not actually been too bad; the manufacturing and services sector growth figures for September were significantly better than expected. However, concerns that forward-looking data suggests a further slowdown are prevailing. There are signs that concrete progress on the eurozone debt crisis will be made this weekend, but there will be no magic wand solution and the UK remains vulnerable to financial tensions in Europe. These are the two key concerns for the MPC.

Amid the context of weak growth and global financial turmoil, the QE call from the MPC was the right one. The fact that £100bn worth of asset-purchases was debated at the last MPC meeting suggests that there is plenty of scope for yet more quantitative easing here in the UK. The BoE’s last quarterly inflation report gave a glowing assessment of the boost the last round of QE gave to UK GDP, so more asset-purchases early next year would not be a surprise. The minutes clearly show that the MPC will be constantly reviewing the size of the asset-purchase programme in line with developments at both home and abroad.

One major issue is that of soaring UK inflation, which quantitative easing could well exacerbate. Data this week showed that UK headline inflation hit 5.2% in September, which represents a three year high. The BoE is convinced the figure will come back down to 2.0% next year due to weaker growth. However, if inflation persists at these sorts of levels, the MPC may delay its decision to introduce yet more asset-purchases. Such high inflation combined with such weak growth also highlights the threat of stagflation in the UK.

Sterling suffered a knee-jerk slide on the news that the MPC voted unanimously for QE, but losses were quickly recouped against both the euro and the dollar. The minutes really just confirmed the market’s strong suspicions that the MPC acted assertively on QE and is happy to do so again if conditions dictate. Sterling is likely to struggle to gain any real favour until economic growth picks up. External factors, particularly events in the eurozone, are likely to determine whether sterling can climb.

Richard Driver

Currency Analyst – Caxton FX
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Is this a blip, or the beginnings of a double-dip?

It seems from yesterday's MPC minutes – the meeting to which was crucially held prior to the release of our shock GDP figure - that the balance of power between the hawks and the doves has shifted. The idea of raising interest rates to combat rising inflation - estimates of which reach to 5% by end of the year thanks to the triple whammy of high energy prices, import costs and the VAT rise - is increasingly on the agenda.

The anticipation of raising interest rates was enough to boost sterling at the beginning of the month. However, with negative economic growth, stagflation is fast becoming the new buzzword and any further rally for sterling has been well and truly checked. 

Imagine if you will, if on the 13^th January, the 9 member committee had voted for a quarter point increase in the base rate. Borrowing costs on the rise, just as the word double-dip is reintroduced to every editor trying to flog their paper. Panic? Probably, yes.

To this end King was probably correct in keeping monetary policy loose, at least for now. After all, how is a UK based rate rise going to curb rising fuel and food costs exactly? 

King is walking a very fine line at the moment; keeping interest rates low for too long could inevitably lead to longer term problems for the economy; raising them too early and what little confidence there is in an already weak economy would be eroded.

To be fair, the paper floggers may be jumping on the bandwagon to a certain extent; are we facing a double dip? Not yet, at least not technically – we would need to see 2 quarters of consecutive contraction first. The GDP figure that is causing all this mischief for the pound (as I detailed in my previous blog post) could still be revised up. The weather, the volatile nature of data when emerging from recession, and the fact that the 0.5% figure only accounted for 40% of surveys issued heightens the possibility that the figure will be revised. The second estimate (not due until Feb 25^th) could offer a more uplifting figure for the policy members to get their teeth stuck into. The pound meanwhile hangs in the balance.

Edward Knox

Analyst

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