November 8, 2012

BoE Holds Off on QE

New lending scheme, inflation worries spur decision

The Bank of England (BoE) held off at its latest meeting on pouring additional funds into the British economy, opting instead to rely on a new lending scheme devised by the bank as concern over inflation grew.

Reuters reported Thursday that the Monetary Policy Committee (MPC) decided that unexpectedly strong Q3 economic reports justified abstention from additional QE, although should the situation change for the worse that could change. The MPC also kept the main interest rate at 0.5%, a move expected by economists.

While at last month's meeting MPC member Martin Weale pointed out that another round of quantitative easing could prove to be incompatible with the bank's inflation target, and BoE chief economist Spencer Dale said that inflation was sticky, inflation actually fell in September to 2.2%. But that is above its 2% target, and it doesn’t include the large price increases from four of Britain's biggest energy suppliers that have taken effect.

The MPC also hopes the bank's new Funding for Lending Scheme will provide much-needed credit to both businesses and consumers, although it could be a few more months before the effect on the British economy is noticeable.

"We are pretty sure that the economy will need more stimulus in the months ahead," said Vicky Redwood at Capital Economics in the report. She added, "And we do not think that the committee is out of firepower yet. In any case, conceding that there is nothing more it can do would hardly help confidence."

Redwood also pointed out that while more gilt purchases were still likely in the near term, afterward "the MPC will have to venture into even more unconventional territory," perhaps by such strategies as the purchase of private-sector assets.

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