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Sluggish growth could see QE return

Quantitative easing could resume in the UK during the opening months of 2011 if GDP growth starts to slow, according to Capital Economics.

Consumer and debt specialist at the research consultancy, Vicky Redwood, says the Bank of England’s November inflation report did not rule out the monetary policy committee following the Federal Reserve in undertaking a second programme of quantitative easing at the start of next year.

Redwood adds that the MPC appears “very optimistic” in its prediction that UK GDP will grow by 3 per cent over the next year in light of the impending fiscal contraction. She suggests that failure to meet this target could herald a renewed asset purchase programme.

She says: “If we are right in expecting growth to slow to just 1 per cent next year, the case for doing more QE should become more clear cut. Indeed, we still think QE2 could be launched as soon as February.”

On November 4, the Federal Reserve confirmed that it would pump $600bn into the US economy, bringing a rally in global asset prices.

Capital Economics chief international economist Julian Jessop suggests that many economies will be struck by upward pressure on headline inflation as a result.

He claims the Fed’s move has raised the risk of the financial markets “running ahead of themselves”, which the Bank of England will be keen to avoid in the UK.

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