THIS MONTH’S DECISION: HOLD
The minutes from recent Monetary Policy Committee meetings have been anticipated more for the analysis of members’ attitudes to quantitative easing than to garner any clues regarding interest rate movement.
Indeed, February’s meeting saw seven members vote in favour of increasing the QE programme by £50bn, while David Miles and Adam Posen voted in favour of the Bank of England boosting the programme by £75bn.
The latest round of asset purchases agreed by the Bank brings the total amount pumped into the economy since the financial crisis to £325bn. These latest purchases, which will comprise government bonds, are scheduled to take three months to complete, taking the MPC up to its meeting in May. So unless there is a marked shift in the economic outlook it is unlikely it will adjust the policy and we expect no change in QE at the March MPC meeting.
The MPC has spent the past couple of years grappling with the fact that although inflation appeared stuck well above the 2% target, the underlying weakness in the economy meant there were reasons to worry that inflation would become entrenched below target in the medium term.
The inflation rate has started to decline – consumer price index inflation stood at 3.6% in January, down from 5.2% last September – and the MPC’s latest quarterly forecasts reflect concern that inflation might fall persistently below target in the medium term. However, there appears to be no strong momentum behind further policy loosening. With the stock of asset purchases now exceeding a fifth of the UK’s annual national income, MPC members, including the perennially dovish Posen, have stressed that they see the risks around hitting the inflation target as broadly balanced.
Moreover, recent retail sales data suggests consumers may be in better health than had been thought. Approvals for lending were up in January and there are signs that domestic and overseas activity have improved following a weak end to 2011. So it is far from clear that additional policy loosening is in the pipeline, although it may take relatively little downside news to prompt the committee into further action.
The Bank has so far ignored calls from aggrieved savers and pensioners as such measures may put extra pressure on annuity and savings rates. Bank governor Mervyn King said recently that he had deep sympathy with savers who are receiving negligible returns through no fault of their own.
He added that raising interest rates to 4% or 5% would give the impression savings returns had gone up, but would lead to a decrease in the value of assets, falls in investment and consumer spending, and a return to recession. King also hinted that the base rate will stay at 0.5% until 2014, saying the economy was moving in the right direction although it would zigzag in and out of growth in 2012. So while no potential interest rate movement appears to be on the horizon, it’s the further expansion of QE and inflationary forecasts that remain the ones to watch.
David Finlay, Managing Director for Mortgages, Barclays, Decisiom: Hold
Mehrdad Yousef, Inustry Consutant, Decision: Hold
Dev Malle, Sales director, Personal Touch Financial Services, Decision: Hold
Vic Jannels, Chairman, All Types of Mortgages, Decision: Hold
John Cupis, Managing director, PMS, Decision: Hold
Mark Harris, Chief Executive, SPF private finance, Decision: hold
Ray Boulger, Senior technical manager, John Charcol, Decision: hold
Fahim Antoniades, Group Director, Mortgage centre ifa, Decision: hold
Peter Williams, Executive Director, IMLA, Decision: hold