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Bank of England points to QE2 inflation dilemma

Bank's monetary policy committee unanimous on need for more quantitative easing, but 'uncertain' about the impact on inflation.

Bank of England points to QE2 inflation dilemma

The Bank of England’s decision-makers agreed unanimously on the need to stimulate the economy again when they launched QE2 earlier this month, but there was ‘considerable uncertainty’ about how much cash could be injected while keeping inflation in check.

The minutes from the Bank’s monetary policy committee (MPC)'s latest meeting, in early October, show that the committee considered a range of asset purchases of between £50 billion and £100 billion, before all nine members agreed to finance a further £75 billion of asset purchases, while keeping interest rates at a record low of 0.5%.

Sterling gave up its gains after the release of the MPC’s closely scrutinised minutes, falling to $1.571 from a day high of $1.578. 

‘Depending on developments in the euro area and financial markets, the size of the stimulus could be adjusted in either direction. For some members, the substantial downside risks pointed to injecting a larger monetary stimulus than otherwise in order to place the UK economy in a stronger position were those risks to materialise,’ according to the minutes.

The publication comes after figures yesterday showed inflation rose to 5.2% annually in September, pushed higher above the Bank's 2% target by utility companies’ energy price hikes. The annual rate of CPI inflation has never been higher since official series began in January 1997, while the annual increase in RPI – to 5.6% in September – was higher only in June 1991.

But the Bank, and City economists, expect inflation to fall back sharply next year. This view prompted Bank governor Mervyn King to say in a speech last night 'so it is the outlook for inflation, rather than its current rate, which explains the MPC's decision to resume asset purchases'. 

The committee warned over the continued squeeze on UK households, as well as the global economic downturn, which was hitting the UK’s export markets. ‘And heightened awareness of the vulnerabilities associated with the indebtedness of several euro-area governments and banks had led to a further deterioration in demand,’ it said.

Economists, who read the minutes carefully for signs of the Bank's future intentions, said they revealed the committee’s worsening view of the economy’s prospects. ‘The minutes of the October MPC meeting reveal a marked escalation of concern within the committee over the current state of the economy and the outlook – which were echoed by Sir Mervyn King in his speech to the Institute of Directors – thereby suggesting that further quantitative easing is very much on the cards early on in 2012 unless there is a clear pick up in activity,’ said Howard Archer of IHS Global Insight.

King said in his speech last night that 'the global nature of the crisis means that monetary and fiscal policy in the United Kingdom can only do so much'. 

Economist Philip Rush of Nomura cautioned that the unanimous decision signalled an unwelcome return to a 'group think' mentality among the committee 'that might stymie debate and under-represent the undeniable inflation risks in both directions.'

25 comments so far. Why not have your say?


Oct 19, 2011 at 10:44

It is becoming very clear that the MPC is no longer a guardian of low inflation in the UK. Over the past four years there has been very limited periods when the CPI measure has been anywhere near the target (2%) which the MPC is mandated to follow.

Further, I would argue that the persistently high inflation (on either a CPI or RPI measure) is squeezing consumers now very hard and clearly reducing their purchasing power, such that this is a major contributing factor for the slow down in spending and the lack of growth in the ecnomy.

What is really now concerning and I believe that the concerns will grow, is that the whole basis of Bank of England policy (implicitly supported by the Coalition government), is to reduce the value of the indebtedness overhang in real terms by inflating their way out of the problem.

Thus the pain for borrowers will be reduced in real terms, but the pain for savers and others on fixed income will be much greater. In terms of principle such a policy further undermines the reason to save, since what is the point if it will be eroded by inflation.

It is in my view now essential for the policy makers in the UK to come to terms with reality. Yes the economy requires to be rebalanced, however people, corporates and government need to face up to the debt position, accept that there will be pain but move towards more normal fiscal and monetary policy.

Further quantative easing is a massive policy blunder and this will become apparent in terms of embedded inflation and a weakened currency over the next 2-5 years.

It is essential that the necessary policies are pursued even though they will bring short term pain, however it is better this than long term structural damage to the wealth and competitiveness of the UK economy.

These are very dangerous times and the policy makers in the UK are raising the risk profile further with their ill founded and dangerous policies.

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Rose G

Oct 19, 2011 at 11:05

Let's admit it - they have not got a clue as to how we are going to be affected by the daft policy of printing more money - my understanding of simple arithmetics inform me that my pound will be nearly worthless by the time they finish with their so called policies - all this means that we spend more to get even less than ever before!

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Anonymous 1 needed this 'off the record'

Oct 19, 2011 at 12:22

I sat through the Governor's speech at the dinner last night which as one of my guests summarised was "we're all doomed then". Basically inflation has nothing to do with BoE (so begs question about what they do all day) and the only way we'll get out of this mess is if China stops selling us things and starts buying our products. This obviously ignores the fact that 1) we don't make anythign anymore 2) they can make anything they want cheaper than us already. Glad to see policy makers have such a good plan to get us out of this mess.

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Andy Mann

Oct 19, 2011 at 12:26

The BoE Monetary Policy Commitee is charged with ensuring price stability and preventing untoward growth of monetary aggregates. Clearly, they have abdicated from this role and have collectively decided to let inflation rip.

QE in both the UK and US has fueled inflation but it has not been beneficial in terms of employment, GDP or increased lending to small businesses. If the MPC will not shoulder its responsibilities, it must be replaced, and promptly.

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Anonymous 1 needed this 'off the record'

Oct 19, 2011 at 12:32

One other thing. Apparently the Financial crisis is not a liquidity problem but an insolvency problem. No its a leverage problem. There is still too much debt in the system. This is why liquiidity is such a problem as the Bank's are still struggling to fund their balance sheets, this is why losses taken on deleveraging is causing the insolvency problem. The BoE and the Gov't need to finally admit this, let the property market collapse then recap the Bank's then and only then will we move forward.

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Tony Marshall

Oct 19, 2011 at 12:52

This is all so reminiscent of what happened in Japan – there was so much said about their reluctance to face up to zombie banks with unrecoverable debts – the result has to be paralysis or hyper-inflation.

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Cockney Dave

Oct 19, 2011 at 13:38

Instead of the 75billion going into the banks and large companies to ballance the score cards, they should have given £1000 to each tax paying household registered on the voters role with a target to spend that within 3 months on all goods they can no longer afford to buy.

Or, the other option was to use that 75 billion to create a system where the lazy gits who dont work have to clean the streets and fill in pot holes in the roads and learn skills like answer the phone and making tea which will in turn allow them to start becoming a member of society

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Alan Tonks

Oct 19, 2011 at 13:39

Bank of Brain Dead Idiots more like, what did Mervyn get his Knighthood for. It wasn’t for economic common sense that is for sure. So it must have been for licking the floor of the House of Commons.

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Oct 19, 2011 at 13:58

Unfortunately more of the same which will only do more damage to the economy.

Underlying problems of course include high levels of debt, however the real problem is the minimum wage.

The minimum wage level is OK in London where wage rates are higher anyway but in the rest of the country and remote areas they are having a devastating effect. The further north you go the worse the effect gets.

Abolishing it would create a million jobs, get the young into work instead of on benefits, create jobs for poor pensioners, create the hope of employment and the 1st step on the employment ladder for many.

Most of all it would help tackle the "something for nothing" culture created by Labour.

The icing on the cake would be it would make Britain wealthy once again by creating more growth than any other possible policy alone. Why you might say ? Because people will be working and wages will moderate, and inflation will come down benefiting everyone but mostly the poorest.

People need the hope of good employment and this policy has denied them this basic human right and at the same time virtually wrecked the countries finances and ability to get out of this crisis.

I love the idea of a minimum wage but its implementation is crazy and unfair to many forcing them into unemployment. The few people it benefits cannot be compared with the numbers it has pushed out of work.

I hope someone realises how damaging this policy is and does something about it before the economy gets damaged to the point of no return.

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michael coxson

Oct 19, 2011 at 14:07


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Oct 19, 2011 at 15:05

@Cockney Dave - congratulations on an excellent Keynesian solution to the problem. You're spot on - it's far more effective to pay people to do something effective for the common good - digging and filling holes, making tea, that kind of thing, than having them sitting idly on the dole.

@stephen57 - I love the sweeping generalisation that abolishing the minimum wage will 'create a million jobs' Are you sure on that figure - it seems rather exact to me. Maybe just 999,925 - or perhaps slightly over... say 1 million and eight?

Or is it simply a figure you've plucked out of the air with little recourse to research or reason? A bit like the doomsayers who said that the minimum wage would cost us 2 million jobs when it was introduced over a decade ago.

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Oct 19, 2011 at 15:40

Tony Marshall-the 20 lost years in Japan were caused by deflation, not hyperinflation! Cockney Dave is right, QE could do some good but don't give the money to the Banks - they will not distribute it in an effective way which will benefit the economy.Anonymous-and after the property market has crashed do you not think the banks will be adversely affected?You have not mentioned Europe. When Greece fails the banks will be on their knees. Would this be the moment when you start to get the uk sorted out? In 5 to 10 years maybe.

Why blame Mervin King for 5.2%inf lation? Food has gone up internationally because there are more mouths to feed. The oil price has been very high The cost of diesel is the highest in the world-blame government taxes for that. The 5% rise in VAT-more government inspired inflation.King cannot put interest rates up as the £ will rise in value hitting are exports. King is probably right in that these inflation costs are one off rises and will fall out of the inflation rate next year eg the VAT hike.

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Adria 2

Oct 19, 2011 at 15:51

I agree with the thrust of most of the comments. Sadly I feel it’s all a bit pointless. With Mervyn, sorry Sir Mervyn in charge and this Government egging him on to ignore inflation I can’t see any end to this approach of the MPC.

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Anonymous 2 needed this 'off the record'

Oct 19, 2011 at 16:13

Please note, if you spend more than you earn/tax your wealth will decrease, no amount of expensive meetings and restructuring will change this fact..... China has the basics correct..... maybe we ought to sell the UK to them. Certainly the 'unemployed' will have something to do then.....

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Jeremy Bosk

Oct 19, 2011 at 16:45

One intelligent comment from the lot of you. Well said, Merlyn.

Give a £1,000 to everyone in the country? Half would pay off their credit card bills or stuff it under the mattress for a rainy day (because who trusts banks?). The rest would rush out and spend it on Chinese made electronic gadgets.

Inflation will be down to around 2 per cent in 12 months or so.

What you rather the Bank did? Shove up interest rates to make even more struggling companies go bust? Drive a few hundred thousand more poor souls who cannot pay their mortgages onto the streets? Throw a few million more on the dole? I appreciate that increasing the misery and squalor would give you all orgasms but the rest of us get our jollies in less anti-social ways.

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David Evershed

Oct 19, 2011 at 17:08

It is very, very damaging to control inflation once it is out of control. People will be striking for 10% wage increases before long and get 5%.

So bu not increasing interest rtaes but more QE, the Bank is taking a big risk that the UK will get hyperinflation.

Best to cover the risk by investing in inflation linked securities.

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Oct 19, 2011 at 17:23

David Evershed-Do we live in the same country?People are having their wages cut they are losing their jobs. Why do you think inflation is getting out of control?As Jeremy Bosk reminds us,inflation is due to come down. Somehow in the realities we now face, there is scant chance of strikes let alone 10% wage settlements.

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Tony Marshall

Oct 19, 2011 at 17:33

Merlyn - I said paralysis or hyper-inflation: Japan had paralysis; Mervyn King seems to prefer to risk hyper-inflation.

Either way, it's a case of transferring the debts of the profligate to the shoulders of the thrifty.

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Jem Cooper

Oct 20, 2011 at 00:09

You've said it all. Real growth and prosperity come from the application of improved technology and work practices not from pumping up the money supply. All that does is to encourage price rises and allow businesses to survive without essential productivity increases and product quality improvement.

Things won't begin to improve until we have the courage to take the nasty medicine. The powers that be seem to be determined to undo all the good work that Maggie did, in the absurd belief that we can cure the hangover from excessive borrowing by encouraging more borrowing. That is what negative real interest rates and massive lending by the BoE are meant to do. That is what QE is for. It won't help our economy in any meaningful way.

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Jeremy Bosk

Oct 20, 2011 at 07:16

Jem Cooper

When will the Tories tell the truth about Thatcher? She squandered North Sea Oil revenues on vote buying tax cuts. Norway built up a reserve against the day when oil and gas production began to decline. She allowed the Pound to rise and stay high for so long that British manufacturing industry lost millions of jobs. Germany still has a very large number of manufacturing jobs. She promoted the religion of greed and selfishness which animates modern society. She made the very idea of human decency into a sick joke. She and her followers are sociopaths.

Repeating a lie does not make it true. Thatcherism was an economic and social disaster from which we have never recovered.

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Oct 20, 2011 at 08:51

Well said Jeremy!

You can also add the 'right to buy' onto the Thatcherite charge sheet as well.

Financial ringfencing, which prevented local authorities using the proceeds of the sale to build new homes to replace those lost from the rental sector stock has led directly to the housing crisis we have today.

And don't forget she kept the higher rate of tax at 60% for the first eleven years of her term!

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Cockney Dave

Oct 20, 2011 at 09:50

And the pro Labour support group enter the conversation and lower the tone to cheap digs at the tories. Well done guys, you have killed a decent feed here on citywire

in reply to these Thatcher comments, would you like to discuss the wonderful efforts of Gordon Blair and Tony Brown? Dont start me off please

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Oct 20, 2011 at 10:10

Woo -someone dares attack the sainted Thatcher and we're accused of killing a decent feed - then in the next breath you're raising the spectre of Bliar & Brown - well played!

I thought as a registered Keynesian,Dave (your earlier post in this thread refers) you'd appreciate criticism of the wild eyed moneterism that trashed our industrial base in the 80's.

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Jeremy Bosk

Oct 20, 2011 at 10:34

Cockney Dave

Blair and Brown had many faults and I do not support their record either in foreign policy or in economic management. I am a very reluctant Labour voter only because the alternatives are worse.

If some idiot comes out in praise of the Iraq war or Brown's swing from penny pinching to squandermania I will be delighted to disabuse them. But nobody actually supports either. The left despise Blair as much as the right.

I merely seek historical accuracy.

Thatcher was very popular and a strong leader (so were Hitler and Stalin in their day). She was not a good leader.

Economically she did as S-ville and I have said. Socially she promoted greed and selfishness, turning property speculation and spivvery into a state religion. She was and is the antithesis of what the great Tories of the past once represented. Disraeli who invented "one nation" Toryism would have despised her.

Thatcher betrayed Toryism as much as Blair betrayed the left. Neither were good for the country.

Cheap digs? We have all paid a high price for the bad judgement of the leaders of both parties over the last several decades.

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Cockney Dave

Oct 20, 2011 at 11:28

Ok fair play, maybe i jumped the gun with my comment. it was early and thats my excuse, i had not had my morning fag and cuppa :-)

Fair play alos, I know Maggie was far from the best leader in the history of what was once was a great nation, but we only have 2 real choices of government which is a great pity. Look at this government vote for a referendum next week, where is the democracy in that? forcing the mp's to vote no or they will be de-selected. What about what we all want?

Who here would like to see a referendum on withdrawing from the EU?

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