looming public spending cuts and a patchy economic recovery are pushing the Bank of England towards further quantitative easing, the minutes of this month's Monetary Policy Committee (MPC) meeting suggest.
At the meeting in early September, MPC members voted by eight to one to hold interest rates at 0.5 per cent for an 18th consecutive month.
Once again, the dissenting voice was Andrew Sentance, who has been calling for a 25-basis-point rise for three months to curb over-target inflation of 3.1 per cent. Mr Sentance believes that the economy is sufficiently robust to withstand higher rates, and that starting incremental rises now will avoid a shock to the economy from a sudden hike in the future.
But there is growing uncertainty among the other eight MPC members over the sustainability of the recovery. Government austerity measures, a fall-off in global demand and on-going issues over the availability of credit – added to the dip from waning inventory re-stocking – could raise the need for further stimulus measures to avoid a return to recession.
So far, most MPC members continue to believe the £200bn of extra money pumped into the economy through the quantitative easing programme is enough. But for some "the probability that further action would become necessary to stimulate the economy and keep inflation on track to hit the target in the medium term had increased," the MPC minutes show.
Some members believe "the headwinds to a recovery in private sector demand in the UK and overseas were somewhat stronger than previously thought, and that the downside risks to activity had increased". It is "quite likely" that Britain's economic recovery will "not be smooth", with growth in some quarters "relatively slow", the committee concluded.
As a sign of the unpredictable currents in the economy, the MPC this month assessed concerns that inflation will continue to rise, locked in by expectation from consumers and businesses, and also worries that slowing growth could see inflation drop well below the 2 per cent target.
On the one hand a "prolonged period of above-target inflation would lead inflation expectations to drift up, making it more costly to bring inflation back to target," the MPC noted. But there is also a risk that private sector growth will be too slow to replace the boost seen earlier this year from inventory re-stocking, with the danger that it could cause "inflation to fall materially below the target in the medium term".
Economists said the MPC minutes add weight to the expectation that any change from Bank policymakers in the near term will be to stimulate growth rather than raise interest rates. "Overall, the MPC seems to be taking baby steps towards further policy easing," Alan Clarke, an economist at BNP Paribas, said.
Howard Archer, the chief UK economist at IHS Global Insight, is not expecting interest rates to rise to 0.75 per cent before the fourth quarter of next year at the earliest, if not into 2012.
Meanwhile, business groups yesterday expressed relief that rates will remain low and interpreted the tone of the MPC discussions as a welcome sign that the Bank of England is poised to step in to help buoy flagging growth if necessary.
Government austerity measures can only succeed if business is still able to grow, David Kern, the chief economist at the British Chambers of Commerce, said. "British businesses require a prolonged period of low interest rates to cope with the major pressures they face, and to enable them to drive a sustainable recovery," he said. "If signs of a slowdown arise later in the year, the MPC should not hesitate to increase the quantitative easing programme above £200bn."
Since the MPC meeting early this month, official statistics published last week showed retail sales down by 0.5 per cent in August, the first monthly fall since January.
The Confederation of British Industry yesterday revised its economic growth predictions downwards, citing the impact of government austerity measures.
Although the CBI upped its forecasts for this year – from 1.3 per cent to 1.6 per cent – thanks to the boost from inventory re-stocking, the lobby group is now forecasting growth of 2 per cent next year, not the 2.5 per cent originally estimated in June.
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