Roger Bootle's response to September's MPC meeting

  • This month's meeting was always likely to be a non-event, with the Committee just opting to continue with the extra £50bn of quantitative easing (QE) it voted for last month. But once these purchases are completed in November, I expect the Committee to pump yet more billions into the economy.
  • There is no doubt that the economic recovery is continuing to pick up steam. But the UK is already lagging somewhat behind other countries. Whereas economies such as France and Germany expanded in Q2, GDP in the UK fell by 0.7%.
  • The UK should nonetheless pull out of recession later this year, if it has not done so already. And some parts of the economy are doing pretty well. House prices on the Nationwide index rose for the fourth month in a row in August. And the headline activity index of the CIPS/Markit report on services rose to its highest level in nearly two years.
  • However, much of the boost is coming from temporary factors – such as an easing in the pace of destocking or the fiscal stimulus. Once these fade, it is very hard to see what the basis for a strong and sustained recovery will be. My main concerns are the prospect of a severe fiscal tightening and the likelihood of a prolonged period of very weak bank lending.
  • Quantitative easing has at least facilitated a pick-up in corporate bond and equity issuance, thus allowing some firms to bypass the impaired banking system. But this is not an option for riskier and smaller companies. In any case, any money raised might just be used to repay debt. Indeed, QE has given very little boost to the broad money supply so far.
  • Admittedly, the recent "stickiness" of inflation might suggest that prices are failing to respond to the weakness of demand. The headline rate of CPI inflation was unchanged at 1.8% in July and remains far higher than the rates of -0.7% in the euro-zone and -2.1% in the US.
  • But this probably just reflects the effects of the lower pound – which should fade in time. The vast amount of spare capacity that is building – even accounting for a dent to potential output from the credit crunch – is certain to bear down on core price pressures in time. Indeed, this is already evident in the labour market, where private sector pay settlements have fallen to between zero and 1% - compared to normal levels of 3%. The key risk is still deflation.
  • I expect QE to be extended by another £50bn or so in November and even after that the policy may be extended considerably further. Meanwhile, I expect interest rates to be kept at their record low for the foreseeable future. While it makes sense to lay out an exit strategy to reassure the markets that this extraordinary policy can, and will, eventually be reversed, I very much doubt that the MPC will need to use it for several years yet.

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