• With its current programme of asset purchases almost completed, the Monetary Policy Committee will soon have to decide whether the £125bn of quantitative easing (QE) that it has undertaken is enough to get the economy back on track. Given the limited success of QE so far, more will probably be needed.
  • I would not read much into the Committee's decision today just to proceed along the previously agreed path of QE (and of course to leave official interest rates at 0.5%). Given that it will take another month or so to buy the last tranche of assets under the current QE programme, there was no urgency for the Committee to review its policy this month. No doubt the MPC also saw an advantage in waiting until it had reviewed its forecasts for August's Inflation Report before deciding whether or not to extend its programme of asset purchases further.
  • I think that those forecasts will suggest that the MPC has still not done enough to ensure that the tentative economic recovery seen so far takes hold. Although the economy now seems to be close to, if not already, growing again, there is still a long way to go before output rises at decent rates, let alone returns to pre-recession levels.
  • Indeed, the improvements in some of the economic indicators have recently petered out, with mortgage approvals and the closely watched CIPS/Markit report on services simply tracking sideways in the latest data. Meanwhile, stockmarkets have continued to struggle.
  • What's more, the downward revision to GDP in Q1 – taking the total drop in output from its peak to around 5% - suggests that a huge amount of spare capacity is building up, which will act to keep inflationary pressures firmly contained.
  • Of course, it will take time for the QE already undertaken to help the economy. But the early signs are still far from encouraging. Bank lending growth has continued to slow. And the money holdings of firms and households are rising at a slower rate too.
  • I think that the MPC will have to use the last £25bn of the £150bn originally sanctioned by the Chancellor. At the same time, the Committee may well ask permission to increase the limit on QE, so that the groundwork is laid should it turn out – as is quite possible - that even is more required.
  • MPC members have been at pains to point out that the ultra-loose policy stance will at some point be reversed, no doubt to try to preserve the credibility of the policy framework. However, I continue to think that this point is a long way off. In particular, I expect interest rates to be kept at their record low for a prolonged period – which may last for as long as five years.


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