MPC to increase QE to battle recession, say experts
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The Monetary Policy Committee could increase quantitative easing by £50bn in light of today’s surprising GDP results, according to economists.
The Office of National Statistics revealed that GDP fell by 0.4 per cent in Q3 2009, the sixth consecutive quarter of contraction. As a result this is now the most protracted recession since records began in 1955.
Commerzbank analyst Peter Dixon says: “The odds have clearly tipped in favour of an expansion following the MPC meeting in November.”
Dixon says the surprise GDP contraction means the Treasury’s hopes of positive growth by the end of the year are very much in doubt.
“From a market perspective, there are concerns that the UK is underperforming versus the rest of the industrialised world – which are clearly well-founded in view of expectations of positive Q3 GDP growth in the US and euro zone. But the figures only serve to highlight the magnitude of the UK’s problems heading into the downturn.”
“November’s MPC meeting is shaping up to be a cliff-hanger.”
Simon Ward, Henderson New Star
Barclays Capital analyst Simon Hayes agrees. He says the MPC will also probably decide to begin buying up gilts at the end of the year and may even decide to increase interest rates as early as August 2010.
He says: “Although we continue to see the November decision on quantitative easing as being finely balanced, today’s release has led us to push back our expectation for the timing of policy tightening. We had been looking for two consecutive quarters of reasonably solid growth as a spur for the MPC to begin to tighten policy. This weak number suggests it may be the middle of next year before we are in that position.”
Schroders European Economist Azad Zangana agrees. He says: “The GDP decline greatly increases the probability of more quantitative easing - probably extending the programme by as much as £50bn.”
Dixon says today’s ONS announcement makes it much more difficult for the Bank to claim that the easing policy is doing the job which is intended. He predicts that an injection of 12.5 per cent GDP is necessary to reignite the economy, meaning the MPC needs to buy up the equivalent of another 3.5 per cent of GDP, or £50bn.
“There are concerns that the UK is underperforming versus the rest of the industrialised world…the figures only serve to highlight the magnitude of the UK’s problems heading into the downturn.”
Peter Dixon, Commerzbank
He says: “It should also be borne in mind that it takes as long as18 months for the full impact of monetary easing to show through, in which case we have not yet seen the full effect of recent rate cuts, let alone the impact from quantitative easing.”
Henderson New Star economist Simon Ward is not sure that the MPC will decide to take emergency action.
He says: “November’s MPC meeting is shaping up to be a cliff-hanger, with GDP weakness offsetting other factors arguing for an increase in the MPC’s inflation forecast, including recent higher-than-expected outturns, better global economic news, stronger asset and commodity prices and a fall in the exchange rate.”
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