• The Monetary Policy Committee (MPC) is still waiting to see how the effects of its past asset purchases pan out. But based on the evidence so far, I think that the Committee will only be disappointed. Anyone expecting interest rates to rise before the end of the year is barking up the wrong tree. As the economic recovery starts to struggle, I expect a further loosening of monetary policy.
  • Having left interest rates and its programme of asset purchases unchanged again this month, the Committee clearly remains in wait and see mode. What's more, its concerns about loosening policy further while inflation is so far above target are likely to keep the MPC on hold for a while longer, particularly given the added uncertainty due to the general election.
  • But the case for a further policy stimulus could before long look compelling. For a start, the recovery is built on feeble foundations and will soon start to struggle. Admittedly, the rise in GDP in the final quarter of last year was revised up a touch further, from 0.3% to 0.4%. But this is still small fry compared to the vast amount of spare capacity created by the recession.
  • What's more, the improvement has been driven primarily by the turn of the stock cycle. And the rest of the economy still looks in no fit state to take over once the temporary boosts from stockbuilding and government spending fade. Particularly disappointing has been the latest news on the UK's exporting sector. Evidence of a boost from the lower pound remains conspicuous by its absence, with hopes dangerously resting on a strong recovery in the UK's largest export market, the euro-zone.
  • Meanwhile, inflationary pressures already look to be fading, with retailers absorbing much of the rise in VAT at the start of the year. Some members of the MPC have started to fret about the inflationary impact of the lower pound. But even if the pound stays at its current level, import price inflation is likely to get to only a fraction of the rates seen in 2008/9. And I think that the pound could in fact rebound substantially after the election, once markets' concerns about the fiscal position are (I hope) addressed.
  • I still think that inflation will be falling sharply by the middle of next year, leaving the way clear for the MPC to give the economy further support. Initially this is likely to involve more QE. But even some members of the Committee itself have started to question how much good more QE might do. The MPC needs to maintain an open mind about alternative policy options – such as cutting Bank Rate all the way to zero. As for the rate rises that the markets are expecting, I'd be surprised if rates are significantly higher than they are now at the time of the next general election.

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