The Bank of England's £200bn quantitative easing (QE) experiment is set to come to an end next month, with the Monetary Policy Committee (MPC) yesterday voting to leave the scale of the scheme on hold. The remaining money in the programme will be exhausted by the time of the MPC's February meeting and it is then expected – barring shocks – to take the economy off its life support system.
By the time of its next gathering, the MPC will have the advantage of the fourth quarter GDP figures, which are expected to show that the economy grew at the end of the last year. Most economists believe that unless there is an unexpected decline in GDP, the QE programme will be ended.
"February will be a key month for the MPC, but we believe that the odds currently favour them announcing at least a temporary pause in the QE programme as well as continuing to keep interest rates at 0.5 per cent," said Howard Archer, chief UK and European economist at IHS Global Insight.
"Indeed, barring a serious relapse in UK economic activity over the coming months, we believe that the Bank of England is probably now done on quantitative easing."
Most experts believe that the UK economy has now emerged from recession, with the Bank's own predictions, published in November last year, indicating that GDP could rise to about 3 per cent by the middle of the year.
That forecast was made before the third quarter GDP numbers were published by the Office for National Statistics, which showed that the economy shrank by 0.2 per cent in the three months to the end of September.
The figure confounded the view of most analysts who had expected the economy to grow, and left the UK as one of the only major global economies still stuck in recession.
A number of experts outside the Bank argue that its growth predictions are ambitious. Expectation of a sluggish recovery has led several to suggest that QE should be extended beyond next month. "There is still little evidence that the MPC's policy of QE is having the desired effect on money and credit," said Roger Bootle, an economic adviser to Deloitte.
"At its last meeting, the [MPC] deemed the rate of broad money growth 'disappointing'. That's an understatement – the money multipliers have collapsed. I think that the economy will struggle to grow by more than 1 per cent this year and is unlikely to do much better in 2011.
"In light of this, deflation remains a key threat – which in my view justifies further action from the MPC. Not only should the committee extend the QE programme further, but I think that it should consider going the whole hog and cutting interest rates all the way to zero."
Most viewed such action unlikely, but suggest that shutting off QE completely could be the wrong action.
Colin Ellis, an economist at Daiwa Securities, said: "There is a feeling that the Bank's predictions are a little bullish. If the recovery is not as strong as predicted, there needs to be the scope to reintroduce QE. There should certainly be a plan B."
QE was introduced by the Bank of England in March last year to support the flagging economy. The maximum value of the scheme has been increased several times as the Bank has struggled to end the recession.
The extreme measure, which is akin to printing money and in more normal economic circumstances would likely lead to inflationary pressure, is used to buy up financial assets. The Bank has spent most of the £193bn it has already put to work on UK government bonds.
As well as leaving QE untouched yesterday, the MPC also left interest rates unchanged at 0.5 per cent, the level of March last year and the lowest cost of borrowing in the Bank's history.
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