The MPC’s June policy decision was unexpectedly close, with four committee members, including Governor King, voting for further QE. Sir Mervyn, alongside David Miles and Adam Posen, voted for a further £50bn in asset purchases, while Paul Fisher called for £25bn. This suggests that the hurdle to additional QE is low, supporting our view that we will see an additional £50bn in asset purchases then. The vote to keep Bank Rate unchanged was unanimous. Although the committee had a fairly lengthy discussion on the topic, a rate cut in the near term seems unlikely.
We had expected Mr Posen, who had signalled his change of heart fairly strongly in recent speeches, to join Mr Miles in voting for additional QE. The Governor’s vote for QE was not entirely unexpected, as we had thought that Sir Mervyn was likely to be one of the committee members who saw the policy question as “finely balanced” in May. Although Mr Fisher has long been one of the more dovish members of the committee, he has recently laid out a slightly more hawkish position, and so his vote for further QE – albeit a more limited £25bn in additional purchases – is more surprising.
The hurdle to additional QE in July now seems low. The minutes note that “all [MPC members] judged that the balance of risks to medium-term inflation had shifted towards the downside compared to the May Inflation Report projections”, and that “most members judged that some further economic stimulus was either warranted immediately or would probably become warranted in order to meet the inflation target”. The failure to obtain a majority for further QE in June reflects the desire by some members to see how events panned out in the interim – with a focus on the euro area and decisions by the Financial Policy Committee, particularly on bank liquidity, which might help to determine the need for monetary easing.
We would judge the balance of news since the meeting to have supported further QE in July. Although the Greek election results have eased concerns over that country, the situation in Spain has become much more concerning. In addition, further declines in global oil prices and the surprisingly large drop in CPI inflation in May are likely to have lowered perceived upside risks to medium-term inflation. It remains to be seen whether the policy measures outlined in the Governor’s Mansion House speech will materially affect the balance of arguments.
There is greater agreement on the committee that more stimulus is needed than whether QE is the appropriate policy tool. This leaves open the possibility that other policy announcements, by the FPC or BoE and Treasury acting in concert, could negate the need for further monetary stimulus. In particular the focus on the banking system, which QE is explicitly designed to bypass, makes the case for alternative policy options. Nevertheless, we would expect the committee to muster a majority in favour of further QE in July.
The committee also discussed at some length the potential for cutting Bank Rate, but concluded that a further reduction in Bank Rate “would not have any advantages over an expansion of the asset purchase programme”, although it also promised to “keep the position under review”. This suggests that a cut in Bank Rate remains unlikely in the near term. The critical point is that QE gives the MPC greater firepower, with Bank Rate close to its lower bound. It is difficult to see the committee cutting Bank Rate by more than 25bp, but even a 50bp cut would have a smaller impact on output and inflation than a £50bn increase in QE, according to BoE ready-reckoners.
Barclays Capital