Concerns over high inflation in the near-term are preventing the Bank from implementing more QE – ITEM Club

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Nida Ali, economic advisor to the EY ITEM Club, comments on today’s MPC minutes:

  • Increased concerns about inflation in the near-term are preventing the Bank from implementing more QE
  • We remain sceptical about the effectiveness of QE to boost growth  - the Bank needs to devise other ways of easing monetary policy
  • With the Eurozone crisis showing no signs of abating, contingency plans are needed in case the situation escalates

“It’s surprising that the vote for monetary policy remained unchanged from last month. The projections in the May Inflation Report show inflation falling below the 2% target in the medium-term, even though the Bank chose not to increase the size of asset purchases, which pointed to divisions in the Committee. The minutes suggest that increasing concerns about high inflation in the near-term are preventing the Bank from implementing more QE.
 
“However, the tone of the minutes did imply that the Bank is ready to authorise further asset purchases if growth falters. But we have our reservations about the effectiveness of QE in boosting growth. Gilt yields are already depressed at record lows and, in an uncertain environment, the impact on asset prices is likely to be limited. The Bank needs to think of other ways to ease monetary policy.
 
“The arguments for further monetary policy easing have strengthened in recent months. The IMF is exerting pressure on the Bank to implement more unconventional measures, not least by reducing the floor of the Bank Rate from 0.5% to close to 0%. Although this isn't a solution on its own, it would certainly send out the right signal.”