Bank of England decision preview

The Monetary Policy Committee meets today and tomorrow and will announce its decision at noon London time on Thursday. Almost everyone expects no change. The Bank will leave interest rates on hold at 0.5 per cent and maintain its target to buy a total of £175bn assets (roughly 13 per cent of national income) by the end of October. The vast majority of the assets purchased are government bonds and the running total of purchases stands currently at £158bn.

There is a chance that the Bank will decide to reduce the rate of remuneration of “excess reserves” below the Bank Rate of 0.5 per cent, but most of the excitement on this issue has come from market traders, for whom the policy matters greatly, rather than from the Bank. It has always insisted changing remuneration policy is technically tricky and it would not be an important policy change for the economy.

So I’ll predict nothing happens. It’s likely to be one of those, “why did they bother” kind of meetings.

That does not apply to the big MPC meeting in November, when the Bank releases its latest quarterly inflation report and forecasts. It will have to decide whether to extend quantitative easing, or whether to call it a day at £175bn. The Bank is in a mood when it believes that levels matter more than growth rates, both for the economy and for QE. The former suggests an extension is possible, because output remains so depressed, while the latter suggests the Bank has already thrown a lot of money at the problem and the policy should soon be getting some traction through lower market interest rates, cheaper sterling and improved credit flow.

The November meeting will depend crucially on the Bank’s forecasts. In turn, they will depend quite a lot on the data released in the month ahead, particularly the preliminary estimate of third quarter national income, scheduled for 23 October.

The MPC might even have new fiscal projections from the government’s pre-Budget report to chew over. Late October is still just a possibility for the PBR after the GDP number on 23 October, but it is more likely to be held after the Queen opens Parliament on 18 November. The couple of weeks before 18 November is out, due to the Parliamentary timetable.

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