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Prediction of wait and see policy from MPC (Monetary Policy Committee)

Written By Trading Forex News on Monday, February 1, 2010 | 4:47 AM

Prediction of wait and see policy from MPC

THE Bank of England is expected to keep its efforts to boost the money supply on hold this week despite recent feeble economic growth.

Policymakers are expected to freeze quantitative easing at £200bn, while interest rates will also be kept at their record low of 0.5% in their latest decision, due on Thursday.

But the members of the Bank’s Monetary Policy Committee (MPC) are likely to be under intense pressure in the wake of recent unwelcome data.

The committee, which will have access to the in-depth economic predictions of the quarterly inflation report ahead of its publication later in February, is likely to dwell on recent official estimates on gross domestic product (GDP) showing fragile UK growth.

News that the economy left recession in the final three months of last year was greeted with disappointment, as the 0.1% expansion in output was far less than the 0.4% expected by analysts.

Output slumped 4.8% last year – the biggest annual drop since 1949 – while the economy has contracted 6% since the recession began in the second quarter of 2008. A bigger-than-expected spike in inflation in December will also test rate-setters’ resolve.

Consumer Prices Index (CPI) inflation rose to 2.9%, compared with just 1.9% in November, prompting fears over early rate hikes.

The surge – due to unchanged VAT in the month compared with a year earlier, when the temporary cut to 15% to help the economy came in – was the biggest ever annual rise for a single month.

But rate-setters predict inflation will be subdued over the long term by the degree of spare capacity in the economy.

Philip Shaw, of Investec Securities, predicted the second estimate of UK growth could show an expansion, amid more positive survey data and recent falls in unemployment.

He said inflation has been consistently above the Bank’s predictions in the past year.

He said: “The MPC will most likely be in wait-and-see mode for a while. Our central case is that the committee will begin to lift rates from mid-year in response to increasing signs that the recovery is becoming self-sustaining and that the major downside risks to activity are disappearing.”

Allan Monks, of JP Morgan, said he expects rates to start rising in August, while the MPC is predicted to decide on “keeping the door open” to more quantitative easing should growth continue to undershoot expectations.

David Kern, chief economist at the British Chambers of Commerce (BCC), said it was “premature” to start reducing the Bank’s money-boosting measures and also too early to raise interest rates.

“It would be dangerous and unwise to start tightening policy in the belief that the preliminary GDP estimate will be revised upwards,” he said.

“We know that the UK recovery is weak and fragile, so the main policy priority must be to avoid a double-dip recession.”

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