In a confirmation of the current "dovish" bias of the Bank of England's Monetary Policy Committee (MPC), one of the Bank's senior policymakers has stressed that a further round of quantitative easing (QE) – the direct injection of money into the economy – remains an option for the Bank, on top of the £200bn already disbursed.
Paul Fisher, executive director for markets at the Bank, said: "I've said in the past [QE] is still very much on the table as one of our potential policy actions, and it's certainly not ruled out, and people need to be aware of that.
"On the other side, the economy could be much weaker than we expect, pushing down on inflation and risking deflation. Recovering to the target from that could be even harder, at least in my personal view."
On the Bank's official 2 per cent inflation target, Mr Fisher said: "The rate of inflation may well stay above target for the remainder of 2011 and 2012... I would argue that the best we can do with monetary policy is accept the initial impact and then to gently steer inflation back to target in the medium term."
Nor, he said, could any policy have avoided "the adjustment in real wages".
Mr Fisher is regarded as a "swing voter" on the committee, one of the group of four Bank officials who hold the balance of power, headed by the Governor, Sir Mervyn King. With Deputy Governors Paul Tucker and Charlie Bean, they have kept policy unchanged for more than a year. David Miles, an external committee member, also habitually votes with this bloc.
The Bank publishes the latest minutes of the MPC's deliberations today. A stream of weaker economic data and survey evidence has strengthened the hand of those on the MPC who want to keep monetary policy loose.
Speculation is that the next increase in the Bank's base rate will not materialise until November, or later, and the trajectory will be gradual. This is despite the rise in inflation to 4.5 per cent, with a peak of more than 5 per cent expected in the autumn. Most observers seem to have accepted the Bank's argument that the rise in inflation has been caused by temporary factors, including the rise in VAT and global commodity prices.
The balance of opinion on the MPC has tilted since the recent departure of Andrew Sentance. Dr Sentance voted consistently for a rise in rates of 50 basis points; his successor, Ben Broadbent, is thought to be less pessimistic about inflation. Two others – another external appointee, Martin Weale, and the Bank's chief economist, Spencer Dale – have argued for a 25 basis points rise; Adam Posen, an independent member, wants a boost to quantitative easing.
Paul Mortimer-Lee, the global head of market economics at BNP Paribas, said last night: "More quantitative easing is still on the table and the Bank hasn't ruled out extending stimulus. All very dovish indeed, supporting our call – no interest-rate hikes until after next year."
Public borrowing falls
The Office for Budget Responsibility said increased interest payments in inflation-linked gilts were mainly responsible for a modest improvement in public borrowing figures in May. Borrowing came in at £17.4bn – broadly in line with expectations – compared with £18.5bn a year earlier, and was helped by a pick-up in VAT receipts after it rose to 20 per cent in January. Slower than expected growth and higher than anticipated inflation may yet push borrowing ahead of the £121.8bn forecast this year by Chancellor George Osborne compared with £143.2bn in 2010-11, but most analysts are cautious this early in the fiscal year.