And so it begins. The softening up exercise for another splurge of QE.
From the Bank of England’s depressing November inflation report.
First, growth (or lack of):
Output appears likely to be broadly flat in the final quarter of 2011. Growth has been weak throughout the past year, reflecting a fall in real household incomes, persistently tight credit conditions and the effects of the continuing fiscal consolidation. More recently growth has also been buffeted by headwinds from the deterioration in the global outlook, heightened strains in financial markets and banking systems, and an accompanying decline in confidence among UK businesses and households. With all those factors continuing to weigh on spending, the outlook for growth over the first year of the forecast is significantly weaker than in the August Report (Chart 5.2), despite the latest projections being conditioned on a lower assumed path for Bank Rate and a larger stock of asset purchases.
And now inflation:
Chart 5.8 shows the Committee’s best collective judgement of the probability of inflation being above the 2% target, and the corresponding probability from the August Report projection. On balance, the Committee judges that, based on the conditioning assumptions described above,inflation is more likely to be below the target than above it at the forecast horizon, given continuing downward pressure on pay and prices from some margin of economic slack. Relative to the most likely path for inflation, the risks are judged to be broadly balanced.
And 5.9 and 5.10.
So that’s inflation falling to 1.3 per cent in two years and the possibility that annual growth will be below below 1 per cent throughout 2012.
No wonder economists are braced for even more QE.
Nomura’s Philip Rush:
The Inflation Report confirmed to us that the MPC is so concerned about the escalating sovereign-debt crisis that the £25bn QE extension we originally pencilled in for February no longer appears sufficient. We now expect £50bn of new gilt purchases to be announced in February and another £25bn in May. The MPC is also likely to be dissuaded from hiking rates for longer: we push back our forecast for the first hike by six months, taking it into 2014.
Absent another sizeable shock, we still expect the MPC to delay announcing an extension to its restarted QE programme until February, when it can calibrate its response alongside the Inflation Report, as it did with QE1. But the greater weakness in demand means it is likely to be more aggressive than the £25bn we initially expected. Indeed, with the Bank of England forecasting inflation to be below target in the medium term, it is signalling that it expects more QE to be the next step, and not just in a way that tapers off the flow effects. Moreover, the government’s credit-easing policy is likely to deliver up to £20bn of new gilts into the market, which would offset QE’s downward effect on gilt yields unless QE2 was ramped up further. As such, we now expect the MPC to announce a £50bn extension of QE2 in February. The announcement could come earlier, but we do not think that would change it from being implemented over the three months to the May meeting. We then expect a final £25bn extension, leaving the stock at £350bn by August. That would be a similar tapering off in the weekly run rate to QE1, although with issuance probably lower over this period, it would have a bigger impact on net issuance.
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