Bank expected to reject QE path despite fed move

LONDON (Reuters) - The Bank of England is likely to reject a new bout of quantitative easing at Thursday’s Monetary Policy Committee meeting, keeping policy on hold and eschewing the U.S. Federal Reserve’s path of more economic stimulus.

The macroeconomic debate has moved on since the world’s central banks coordinated massive interest rate cuts two years ago to deal with the collapse of the investment bank Lehman Brothers, and Britain faces a finely balanced economic outlook.

Total output is still around 10 percent below where it would have been without the financial crisis. And there are strong headwinds for 2011 from looming public spending cuts which are likely to poleaxe recent outsize growth contributions from government and construction.

But growth over the past six months has been the strongest in a decade as activity rebounds from the deepest recession in postwar history, and inflation has been at least a percentage point above the Bank’s 2 percent target throughout 2010.

“The case for further easing is nowhere near as strong in the UK as in the United States,” said Investec economist Philip Shaw. “There are perhaps fewer downsides to economic prospects than a few months ago.”

Unemployment at 7.7 percent is almost 2 percentage points below that in the United States, while inflation of 3.1 percent is 2 percentage points higher.

No major bank expects a change in policy from the Bank on Thursday, which is seen keeping interest rates on hold at 0.5 percent and the total of quantitative easing steady at 200 billion pounds after a 10-month gilt-buying spree that ended in January.

MPC member Andrew Sentance is likely to repeat his call, in place since June, for rates to start a gradual rise, while his colleague Adam Posen is expected to reiterate his October view that an extra 50 billion pounds of QE is warranted.

QE RISK REMAINS

Royal Bank of Scotland, the final hold-out for more QE in a Reuters poll conducted last week, changed its forecast on Wednesday, citing this week’s strong purchasing managers’ surveys on top of robust third-quarter GDP data.

“The more balanced pattern of growth, relative to our forecast, with stronger services and extraction output offsetting weaker construction goes against our call,” RBS economist Richard Barwell said.

Nonetheless RBS and some others believe that the odds of more Bank QE this month are higher than the roughly 10 percent chance currently priced into markets. A significant number of economists think more QE is likely early in 2011.

BNP Paribas economist Alan Clarke said he now saw a 15-20 percent chance of QE this month -- less than earlier this week after Wednesday’s higher-than-expected services PMI index. RBS’s Barwell pencilled in a 40 percent chance.

“QE in November could still happen. The Committee may still come to the conclusion that their August projections were too optimistic and more stimulus is required,” Barwell said.

The nine-member MPC will have more factors to consider than normal when it meets on Wednesday and Thursday, as it will have advance access to new macroeconomic forecasts in the Bank’s quarterly Inflation Report, which is made public on November 10.

The Inflation Report has proven the trigger for past shifts in Bank policy. This one is likely to show a higher path for growth and inflation in the short term than the Bank had expected in August.

But the level of inflation in two years -- which is more influential for policy -- is still likely to be below the Bank’s 2 percent target, as it was in August, said Clarke.

Who if anyone on the MPC votes for more QE -- or higher rates -- will not be immediately apparent on Thursday, as minutes to the meeting are not published until November 17.

“It’s a very difficult policy debate and it is understandable that committee members take different points of view,” said Investec’s Shaw.