The Bank of England’s latest quarterly inflation report Bank governor Mervyn King warned that any recovery in 2010 would be “slow and protracted”. He also hinted that further measures might be needed to stimulate the economy, in addition to the Bank’s programme of quantitative easing (QE) to spur growth.
The Bank of England’s August Inflation Report gives a clear signal that policy is unlikely to be tightened any time soon and certainly does not rule out a further extension of QE. The inflation forecasts based on market expectations (of a rise in rates to 2% by end-2010 and almost 4% by end-2011) shows inflation expected to undershoot the target, coming in at around 1.5% at the two year policy horizon.
The forecasts based on constant 0.5% rates (and £175bn of QE) show inflation broadly on target on the face of it suggesting that the MPC thinks it has now provided enough support to the economy. But the forecasts are still based on a very sharp V-shaped recovery. If the recovery is more sluggish than this, more QE is likely to be necessary. Indeed, note that the risks to the GDP forecast are skewed to the downside, while at the press conference, Governor Mervyn King sounded pretty downbeat about the prospects for bank lending and the need for balance sheet adjustments more generally. Overall, then, monetary policy looks set to remain extremely loose for some time yet.
UK and European markets have opened again in positive territory up around 0.5%, and U.S futures are currently pointing to a positive start when their markets open up this afternoon.
Sources: Reuters: BBC: Bloomberg: Lawshare: Deutsche Bank (db): Proquote: Financial Times: Wall Street Journal: CLSA: Sharescope: Market News. Capital Economics: CNBC: Wikipedia: GaveKal:
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