More UK QE imminent

The Bank of England will face some tough choices next month when the next Inflation Report is published and the current round of quantitative easing (started in October) comes to an end. It was not wholly surprising to see the latest GDP data this morning showing a fall of 0.2% in the final quarter of 2011. This is not the first negative reading since the emergence from recession towards the end of 2009, but the last one (Q4-‘10) was put down to a number of one-off factors which were subsequently largely reversed. This time around, though even smaller, the decline is harder to dismiss.

Meanwhile, there have been more indications that the BoE may be leaning towards further asset purchases. Last night’s speech from BoE Governor King was a timely reminder that we are in for a long haul and also a period of balance-sheet adjustment. Markets sometimes forget this, but the message was that “past experience shows that recoveries from recessions that are linked to banking crises are slow – but do eventually come”. He also reminded us that we remain in a world of imbalances, the correction of which “is not proving to be a smooth process. But it is necessary”.

These comments, when combined with the minutes of the January MPC meeting released this morning, add further weight to the view that the UK is not done with QE just yet. Whilst there was unanimity surrounding the level of rates and asset purchase program, the minutes revealed that “for some members, the risk of undershooting the target meant that a further expansion of asset purchases was likely to be required”. Even if GDP expands in the current quarter (and we escape a technical recession), for most it will feel like recessionary conditions, especially with credit conditions remaining tight. Furthermore, at least vs. QE1, the impact of the latest round of purchases has been more muted that the first round, even adjusting for the lower size (Insights blog 10/01/12 “The inefficiency of QE2 in the UK”). With the Chancellor not wavering from his fiscal Plan A (and the numbers broadly on track), then further QE appears more likely next month.