Dovish tone of MPC minutes suggests more QE is on the way, says ITEM Club

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

  • Split in June's MPC vote is not surprising and likely to have been prompted by an escalation of the Eurozone crisis
  • The tone of the minutes was dovish and, with inflation easing in May, more QE will almost certainly be authorised next month
  • We continue to have reservations about the effectiveness of QE and think that the Bank needs to devise more unconventional ways to ease monetary policy

“The split in June's MPC vote is not surprising. Economic data since the last meeting has been very mixed, providing no clear signal in either direction, while an escalation of problems in the Eurozone may have been enough to tip some members towards a more proactive policy stance.
“Minutes of previous meetings had suggested that high inflation rates were discouraging the MPC from offering further monetary stimulus. However inflation eased to 2.8% in May and further declines are expected as temporary factors start falling out of the calculation. The tone of the minutes was also dovish as MPC members are become increasingly concerned about the growth outlook. These developments suggest that more QE will almost certainly be implemented next month.
“We agree that more needs to be done on the monetary policy front to support the economy. However, we continue to have our reservations about the effectiveness of using QE to buy gilts. Gilt yields are already very low and are unlikely to be pushed down further, while the uncertain economic environment suggests that the impact on asset prices will be limited.
“In our view, the Bank needs to think of more unconventional measures to ease monetary policy, perhaps by using QE to buy banks' bonds with the aim of reducing banks' borrowing costs or lowering the floor of the interest rate from 0.5% to close to 0%.”