Shadow MPC divided over policy moves
DESPITE early signs of an economic recovery, interest rates should be kept on hold at 0.5 per cent according to all nine of City A.M.’s shadow MPC committee, ahead of the Bank of England’s June monetary policy decision due today at midday.
The Bank of England has already announced asset purchases of £125bn out of the £150bn that was authorised by the chancellor so the big question this month is whether there will be any further quantitative easing (QE).
With signs that the UK economy could see positive growth as early as the third quarter of 2009, economists are wondering if the Bank should consider extending monetary easing.
While the UK’s all-sector purchasing managers’ index released yesterday indicated overall growth in May, last month’s MPC minutes and inflation report both suggested that the Bank is not yet finished with monetary stimulus. Last month, the committee unanimously voted for further asset purchases with some calling for the full £50bn.
The desire for a durable economic recovery rather than a positive blip has meant that some members of our shadow MPC, like Jamie Dannhauser at Lombard Street Research, have called for the Bank to fully utilise the £150bn available to them.
The case for further QE has also been strengthened by the recent surge in sterling against the dollar to seven-month highs earlier this week. This has effectively tightened monetary policy, according to Lloyds TSB economist Trevor Williams.
But Simon Ward at Henderson New Star warns that quantitative easing is a relatively untried policy tool and it can have large effects so the Bank should be cautious about further expansion of the UK’s money supply.
CITY A.M. SHADOW MPC
ALLISTER HEATH CITY A.M.
Hold. Quantitative easing is starting to trigger some growth of the money supply, at least on adjusted measures. Meanwhile, services are edging up again, according to the PMI. The Bank should keep to plan A.
SIMON WARD HENDERSON NEW STAR
Hold. Broad money growth is picking up and the economy will follow. QE is a powerful tool and the MPC needs to be cautious about expanding asset purchases further.
HOWARD ARCHER IHS GLOBAL INSIGHT
Hold and consider further extending quantitative easing. Despite the recent flurry of better data and surveys, very serious obstacles remain to sustainable recovery including ongoing tight credit conditions.
GEORGE BUCKLEY DEUTSCHE BANK
Hold rates and continue quantitative easing at the current pace. The economic news is improving but remains relatively weak, requiring the stimulus to be maintained.
GRAEME LEACH INSTITUTE OF DIRECTORS
Hold. QE done effectively could be a real game changer here but we are unsure as to how effective it’s been and whether in fact we will need more than the £125bn. The jury is still out on this one.
VICKY REDWOOD CAPITAL ECONOMICS
Hold rates. There’s now another £50bn of QE in the pipeline so there’s no need to act this month. But despite the “green shoots” I’d still be considering increasing it further ahead.
MICHAEL SAUNDERS CITIGROUP
Hold. The MPC already announced the second stage of QE but with most gilts so far bought from overseas investors rather than the UK non-bank private sector, they may extend the maturity band of gilt purchases.
JAMIE DANNHAUSER LOMBARD STREET RESEARCH
Hold. The rebound in business confidence confirms that the UK economy is reviving more quickly than many of its peers; but the MPC should vote to expand asset purchases by another £25bn to ensure a sustained recovery.
TREVOR WILLIAMS LLOYDS TSB
Hold with a bias to ease via QE. It is becoming clearer that the worst is over but it is not yet a return to growth. The rebound in sterling is effectively tightening monetary policy.