Market view: QE to be expanded by a further £75bn in 2012

Monetary Policy Committee minutes, published today (22 February), showed that while members voted unanimously to increase the size of the Bank of England’s asset purchase programme at the February meeting, the Committee was divided over the scale of the rise required.

The minutes from the meeting that took place on 8-9 February 2012 showed that two members, David Miles and Adam Posen, voting to increase the size of QE by £75bn, while the other seven members voted for the £50bn increase, which took the total size of the quantitative easing to £325bn.

Both decisions were agreed against a backdrop of negative GDP growth in the final quarter of 2011, albeit one tempered by a series of more positive UK and US results which have come out in the first few months of this year.

Inflation is also falling rapidly and is likely to be below the Bank of England’s 2 per cent target by the end of the year.

Daniel Solomon, economist at the Centre for Economic and Business Research, said: “The Bank is walking a tightrope. Since QE has its effect one to two years in the future, whether its decision to expand the QE programme will be considered prescient or foolhardy will depend on the state of the UK economy in 2013 and 2014.

“The Bank knows this will be hard to predict, writing “there continued to be substantial uncertainties surrounding the outlook for growth”. These uncertainties were attributed to questions overhanging the eurozone’s ability to reform and domestic expenditure by households.”

Mr Soloman said he believes that if the eurozone, the UK’s largest trading partner, can avoid disorderly default by several of its member states, then an export-led recovery might take hold at home.

Mr Solomon said: “This would mean that the recent expansion of the QE programme, and any further expansions, risk overheating the UK economy and driving up inflation. [However,] If the eurozone crisis goes sour and the UK finds itself in another recession, then more QE will be needed to keep growth from freefalling and inflation on target.

“CEBR expects the QE programme to reach a size of £400bn by the end of this year.”

Vicky Redwood, chief UK economist at Capital Economics, said: “Not only did all members vote to increase QE at this month’s meeting, but two members – David Miles and Adam Posen – voted for a £75bn increase.”

Ms Redwood added that one of the arguments for doing £50bn rather than £75bn was “simply the risk that it might send out too negative a signal about the state of the economy”.

She said: “Admittedly, the Inflation Report suggested that significantly more asset purchases are unlikely. However, as we pointed out at the time, the Committee’s forecasts are still based on optimistic expectations for GDP growth.

“We doubt that these will be met, meaning that more QE will still be necessary to stop inflation undershooting its target.”