The Monetary Policy Committee today announced a £75bn expansion of its asset purchase programme. Although this was counter to the consensus (and our own) forecast of unchanged policy this month, the surprise was more in relation to timing as a move to expand QE within the next few months was widely expected (we had expected a move of this size in November). The MPC did not change the policy rate, which remains at 0.5%.
In justification of its decision, the MPC cited the slow pace of global activity, and ongoing turmoil in the euro area, as particular threats to the UK recovery. These came on top of weak domestic demand which was being held back by weak household real income growth and fiscal consolidation. Together, these factors meant inflation was expected to fall sharply next year, despite the likelihood of a rise above 5% in the next month or so, and the MPC considered that the balance of risks to inflation in the medium term had shifted decisively to the downside.
The committee expects the purchase programme to take four months to implement, which suggests that the next main decision on QE will come at the time of the February Inflation Report. Unlike in March 2009, when the MPC announced £75bn of asset purchases but had authorisation from the government to spend up to £150bn, this time the committee asked the government only for the additional £75bn, therefore giving no clear indication of whether it envisages expanding QE beyond £275bn in total. The Chancellor has indicated that up to £50bn of the purchases could be in the form of private sector assets. However, the Bank of England has indicated that the whole of the £75bn will be spent on gilts.
Although the case for more policy stimulus is compelling, expanding QE is not without risks. Sterling has fallen on the announcement and the UK is likely to see an unwelcome rise in imported inflation as a consequence. In addition, there remains a great deal of uncertainty about the potency of QE. In particular, the first round of QE in 2009 was accompanied by monetary expansions by the Fed and the ECB that provided a significant boost to global liquidity and risk appetite. With these central banks apparently less inclined to engage in aggressive loosening, the MPC may find it gets less bang for its buck this time round.
BARCLAYS CAPITAL
ECONOMICS RESEARCH | INSTANT INSIGHTS