The Bank of England's Monetary Policy Committee is facing one of the toughest decisions in its decade-long history. Observers expect fireworks at its two-day meeting, starting today, with a split committee facing a crucial vote on whether to extend the Bank's policy of quantitative easing (QE), which has already injected over £150bn of potential spending power directly into the economy. The Bank Rate has been kept at 0.5 per cent since the spring.
Signals from the economy have been increasingly confusing, with Halifax reporting that house prices rose by a robust 1.2 per cent month-on-month in October, contrasting with the Chartered Institute of Purchasing and Supply saying that the construction industry saw a further fall in activity and jobs being cut at the sharpest rate in four months in October. The Nationwide's Consumer Confidence Index reported little change in confidence.
Business leaders have already called on the Bank to be bolder, especially with the probability of tax increases and public spending cuts in the forthcoming pre-Budget report. David Kern, the chief economist at the British Chambers of Commerce, has called for an immediate £25bn increase in the policy to £200bn, "with the option of additional increases later on".
The former MPC member David Blanchflower, the "ultra-dove" who has been harshly critical of his ex-colleagues on the committee – "inflation nutters" – has said that the programme needs to reach £250bn to prevent unemployment rising catastrophically past the 3 million mark.
By contrast, the Bank argues that the policy has worked, at least in the sense that the economy would be in an even weaker position now if it had not embarked on the programme, initially of £75bn, in March.
Bank officials point to the way that the programme of gilt purchases has depressed yields and encouraged investors to switch to equities and corporate bonds, allowing many firms, and especially the banks, to raise fresh private funding. Against that, some MPC members, such as the Bank's chief economist, Spencer Dale, who voted against Mr King in August, have warned that QE could simply lead to new "asset bubbles". Others, such as new MPC member Adam Posen, have said that, even if QE has eased conditions in the capital markets accessed by large companies, it has not yet delivered a boost to bank lending – crucial to smaller businesses and the property market.
Shockingly weak figures on UK growth during the third quarter – a 0.4 per cent contraction while other advanced economies are emerging from recession – have strengthened the case of the "doves" on the committee. The November MPC meeting will be followed next week by the publication of the Bank's quarterly Inflation Report, an opportunity for the Bank to explain its policy.