Bank of England interest rate and quantitative easing forecasts

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Category: Featured

Published on Tuesday, 20 September 2011 10:37

Written by RBS Economics

RBS see an increase in votes cast for further quantitative easing in November.

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This week, the BoE minutes and the FOMC meeting on Wednesday are the main events.

The MPC left policy settings on hold in September, as expected. The policy bias within the Committee has been shifting in a dovish direction in recent months, most visibly in August when both Spencer Dale and Martin Weale retreated from voting for 25bp increases in the bank rate.

The overarching theme in September is how much further the MPC has moved.

The flow of economic data and surveys in the run-up to September's MPC meeting signalled a further deterioration, alongside evidence of heightened financial stress.

The macroeconomic data alone are probably not sufficient to prompt additional votes for QE in September – prevailing elevated (and rising) levels of inflation continue to present a hurdle. By contrast, it is perfectly possible that some members will be sufficiently concerned by financial market developments to vote for immediate QE purchases.

On balance, in September, we expect unanimous support for an unchanged bank rate and for Adam Posen to have remained the sole supporter of QE – additional dissenting votes on QE are much more likely in October and especially November.

The risks around our 'no change' forecast are clearly skewed towards one or possibly two additional dovish dissenters on QE.
 
We look for the Fed to announce further action to support the economy following the FOMC meeting. While several tools remain in the monetary policy toolkit, the two most likely options being considered at this time are lengthening the duration of the Fed's portfolio and a little less likely cutting the interest rate on excess reserves.

We expect a repeat of August's triple dissent by Fisher, Plosser, and Kocherlakota.

We do not expect policymakers to provide additional clarity with respect to the forward-looking guidance at this time, though the release of the minutes in October will likely reveal that this topic was discussed at the meeting.

We don't think the Committee will alter its assessment of the economic outlook significantly as the characterisation of the economy in the FOMC statement was downgraded significantly already during the August meeting. RBS Economics