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Bank of England inflation report to leave policy options open

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The Bank of England is likely to signal further quantitative easing remains possible when it publishes its quarterly forecasts today.

Markets are still betting the central bank may eventually expand its 200 billion pound asset purchase programme after a similar move by the U.S. Federal Reserve last week, although recently firm data have reduced expectations of such a move.

Policymakers may be reluctant to unsettle investors by ruling out any additional quantitative easing because they will want to see how 81 billion pounds of government spending cuts hit activity when they start to take effect in 2011.

But with inflation holding well above the Bank’s 2 percent target all this year and likely to stay there in early 2011, the spotlight will be on Governor Mervyn King’s news conference for insight into how the Bank perceives the balance of risks.

“We’ve had some reassuring economic news over past couple of months, but not enough to make the MPC sufficiently confident over the direction of the next move in policy,” said Philip Shaw, economist at Investec.

“There remains a chance — although less than 50 percent — that the committee will sanction further QE. Markets are going to look at the tone of the Inflation Report to see whether that remains the case, and we suspect that it probably will do, despite the brighter news on the real economy and some disappointing news on inflation.”

Inflation has been at least 1 percentage point above the Bank’s target throughout this year, forcing Governor Mervyn King to write a series of explanatory letters to the government, and January’s sales tax rise and a weaker pound will keep it high.

The forecasts are likely to show inflation further above target in early 2011 than predicted in August, due to a recently announced rise in energy bills, although the Bank will probably maintain its forecast for below-target inflation further out.

“We expect that the Inflation Report again will project that, even with fairly strong real GDP growth, the economy has enough slack to pull inflation below target 2-3 years ahead,” said Michael Saunders, economist at Citi.

The economic data since August have been mixed: house prices have fallen, consumer confidence and retail sales are weak, and the jobs market is showing conflicting signals. But activity surveys and overall economic growth have been stronger.

But despite the 0.8 percent growth the economy enjoyed between July and September, which was higher than the Bank projected in its August Inflation Report, most analysts reckon the economic outlook for the two-year period will be broadly similar. “We expect the November Inflation Report to bear a close resemblance to that in August, perhaps indicating a small bias to loosen but with the main stress being on the heightened uncertainty surrounding the outlook, with the result that the next move in policy could be in either direction,” said Simon Hayes at Barclays Capital.
Source: Reuters

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