The Bank of England’s Monetary Policy Committee decided today to maintain interest rates at the historic low of 0.5% whilst maintaining the asset purchase programme at Â£275 billion.
But with a weak start to 2012 as indicated by the disappointing performance of some retail heavyweights more quantitative easing may be on the cards.
But not all agree that QE is the automatic assumption and that further QE might actually just end up with many companies using the cash to bolster balance sheets as opposed to using it for lending/investment.
KPMG’s chief economist, Andrew Smith, commented “‘No change’ this month doesn’t mean there is no need for further policy relaxation. The economy has clearly entered a weak patch, apparently stalling in the fourth quarter, and further fiscal tightening is scheduled for the coming financial year. Against this backdrop a further round of quantitative easing looks likely to be announced in the next few months while interest rates will remain on hold for the foreseeable future.”
And Nida Ali, economic adviser to the Ernst & Young ITEM Club said “MPC members on various occasions have made their intentions of implementing more QE (following their move of raising the size of asset purchases in November) very clear. We expected this to come through in the early months of 2012. So with policy remaining unchanged in January, it is only a matter of time before the Bank raises the size of asset purchases further. While we agree that the economy is in dire need of monetary policy support, we are doubtful about the Bank’s approach of using this money to purchase gilts. Gilt yields are already very depressed, and are unlikely to go down any further. Meanwhile the scale of uncertainty, stemming from various factors – not least the Eurozone debt crisis – implies that the impact on asset prices will also be limited. Furthermore, business confidence has been steadily declining, suggesting that companies will want to hoard the extra money and strengthen their balance sheets, rather than release it for investment. The Bank recently introduced the Extended Collateral Term Repo Facility, which will help to ease the effect of the current money market stresses on bank lending. It is encouraging that they are trying to come up with creative solutions to ease credit conditions, but more is required to support the faltering economic recovery.”
The European Central Bank has also maintained its interest rates at a record low of 1% as most had predicted. The ECB President, Mario Draghi, did though say that "The economic outlook remains subject to high uncertainty and substantial downside risks".
Analyst for Caxton FX, Richard Driver commented “It was no great surprise to see the European Central Bank (ECB) holding interest rates at 1% as it’s more than likely that they will want to wait and see the effect of their liquidity measures for the time being. But it is worth keeping in mind that the eurozone is possibly heading into recession and the risks of deflation are material, so it wouldn’t be a great surprise if we see another rate cut before the end of Q1, particularly with the focus on eurozone growth that isÂ emerging from EU leaders."