The Brits have got a big event coming up tomorrow as the Bank of England‘s monetary policy committee will be releasing its decision on interest rates and other quantitative easing measures. In its statement earlier this year, the MPC decided to keep rates at 0.5% while also keeping its asset purchase plan at ₤200 billion.
My buddies over at Threadneedle Street tell me however, that things could be different this time around. Word is that the MPC officials are split on what to do with regards to quantitative easing since the UK economy is a bit wonky right now. What could they be up to?
On one hand, the BOE has already pumped a ridiculously huge amount of liquidity in the financial system, forcing inflation to surge way past the 2% central bank target. In fact, price levels rose by 2.9% in December amidst a measly 0.1% uptick in GDP. And don’t get me started on the worsening labor conditions in the UK… Remember when we talked about stagflation in one of my old articles? Further quantitative easing could just force the issue!
Aside from that, many are growing concerned about the possibility of Housing Bubble Part II: British Edition. No, I’m not talking about a new television series. I’m referring to speculations of another housing market crash, this time in the UK. According to the latest scoop in the housing market, house prices are currently nearing their 2008 highs, propped up by excess liquidity and record low interest rates. Yikes!
On the other hand, there is this rumor going around that the MPC could still extend its quantitative easing program. Even if the UK managed to crawl out of the recession during the final quarter of 2009, the economic growth it experienced was merely 0.1%, which was four times lower than the expected figure. Lending to businesses also remained weak in December, increasing only 0.4% after rising 0.7% the month before.
Economic data aside, BOE Governor Mervyn King also said recently that the country’s money supply was “undesirably low.” This prompted some analysts to speculate that further expansion of the central bank’s stimulus program isn’t entirely impossible. Is an expansion of the BOE’s quantitative easing program more likely than what people think?
With the UK’s mounting problems, specifically, high level of debt, high inflation, high unemployment, and dismal growth, the British government and the BOE are pretty much stuck between a rock and hard place. The government cannot simply put on more spending to encourage business activity because of their outstanding debt. Likewise, the BOE cannot just expand their QE program because, as I’ve mentioned earlier, doing so could potentially cause the country’s inflation to accelerate further.
The BOE could just ride things out and hope that the growth of their neighboring economies trickles down on theirs as well. While an expansion in its purchase facility to address the economy’s feeble growth and weak labor market could have an immediate negative impact on the pound, leaving it as is would not in any way relieve the country of their other difficulties. With that said, the UK’s lowly economic condition could still drag the pound under until their economy crawls its way out of its present rut.