The Great British Krona has taken a knock following the publication of the September MPC minutes.
For context, that’s an 8-month low against the dollar.
And so to the comment.
Nomura’s economics team focus on the difficult PR task that faces the Bank:
Justifying an explicit change in policy in favour of easing when inflation and expectations for it are so high is an extremely difficult communication challenge that stretches credibility. So the MPC has collectively started to prime the public and its policy cannons for the launch of QE2. Some members would see the mere continuation of recent conditions as sufficient to justify it, while most members thought that it was increasingly probable that further asset purchases would be warranted at some point. In the light of the deterioration in the outlook, it was perhaps more surprising that all members did not think the probability had increased recently. Nevertheless, the inclusion of this statement shows that the MPC is progressively preparing to launch QE2, further raising the probability of it happening, in our view.
The ever-reliable Howard Archer at IHS Global Insight reckons QE2 could be launched as early as October.
The minutes of the September MPC meeting are appreciably more dovish, opening the door wide to more Quantitative Easing by the Bank of England and very possibly sooner rather than later. Barring a marked improvement in the economy over the next few weeks (which is currently hard to see), we expect the MPC to approve a further £50 billion in Quantitative Easing during the fourth quarter. A move as soon as October is entirely possible, but we suspect November is more likely.
Meanwhile, it is apparent that any interest rate hike has completely disappeared from the Bank of England’s radar and it is unlikely to re-appear for some considerable time to come given the economy’s softness. There was once again a 9-0 vote in favour of unchanged interest rates in September, and a hike currently looks ever more unlikely before 2013.
However, Merrill’s Nick Bate reckons the MPC will go for November.
So overall, while the vote at the meeting was a little more hawkish than some expectations, the detail of the discussion was not. Given that the outlook has arguably deteriorated further since the September MPC meeting – though perhaps not as swiftly as through August – there could very plausibly be some additional votes for more QE at the October meeting, in our view. Nevertheless, the November meeting, set against the backdrop of the November Inflation Report, might still be the most likely time for more QE.
He’s also produced a little chart.
As yet, no one has addressed the question of whether QE2 will be effective. The BoE made it views clear in its latest Quarterly Bulletin. But what we want to know is what the economists really think…
Update: 12.14pm (London time)
The view from RBS, which reckons the Governor might be siding with Mr QE, Adam Posen.
We now think that QE2 is more likely than not in 2012. As the Minutes reveal ‘most members thought that it was increasingly probable that further asset purchases to loosen monetary conditions would become warranted at some point’. Clearly the risks of QE2 in 2011 have increased too, although October still looks very unlikely. When it comes to the November decision we would expect one or two members of the Committee to be voting with Posen for QE2 but for the doves still to be in the minority unless there is a material deterioration in the outlook between then and now. The October Minutes, speeches and the data flow should give us an opportunity to refine that call as we approach the November policy decision.
As we noted earlier this summer (BoE QE2: not now, maybe later) we continue to believe that many Committee members would need a lot of convincing to vote to increase asset purchases this year. The Minutes speak to those concerns: there is merit in a wait and see policy (not least to allow policymakers on the Continent time to resolve the debt crisis); the Maradona Theory of QE (the market pricing in the prospects of QE2) has already done some of the work for them; and last but not least, the problems involved in easing policy when inflation is (so far) above target. It is not clear why these concerns would evaporate over the next couple of months, but they should start to dissipate as we enter 2012, in time for the February Inflation Report.
In contrast, for a smaller number of Committee members, the Minutes reveal that a continuation of current conditions would probably be sufficient to justify QE2 at a subsequent meeting. At the risk of reading too much into the drafting, this is not a promise (‘probably be sufficient’) and more importantly this statement does not necessarily indicate that any change of vote will occur in the next meeting (October). The most likely occasion for a shift in the vote would be the November policy meeting so unless the outlook improves, we would expect Adam Posen to be joined by one or two other members of the Committee. Based on the little information we have, that would most likely be the Governor (who ‘qualitatively agrees’ with Posen) and Paul Fisher (although he has said that it would take the risk of deflation to trigger QE2).