Dovish Minutes

The Bank of England Minutes from the 9 February meeting on monetary policy was somewhat more dovish than the market had anticipated. Our expectation was that the decision to increase the asset purchase target by £50bn to £325bn was unanimous, but it turned out that two members of the committee, David Miles and Adam Posen, preferred to increase the programme by £75bn. While the current programme runs over three months, it was not specified how the dissenters wanted to spread out the purchases. The market considered prior to the release that there would be three dissenters – but that these had preferred not to do more QE at all. The result was a complete shift in market sentiment and the interpretation was that the MPC clearly upholds a dovish stance and that more gilt purchases are more likely to be announced when the current programme finishes.

QE programme is likely to be extended in May

Our base rate indicator clearly suggests that more QE will be announced in May. No less than eight out of ten input factors are below trend and five of these are substantially below fair value (defined as more than one standard deviation away from 10-year mean). Especially low consumer confidence, money growth and declining disposable incomes for households are weighing down on the indicator. Only the most recent pick-up in service sector sentiment and still high current inflation suggest some normalisation of rates. The outlook for monetary policy today can be compared to 2009; back then, the BoE ended up buying gilts worth £200bn to combat the economic and financial crisis. To avoid a technical double dip recession, we think the BoE will end up having spent the same amount again when this year is over, i.e. QE totalling £400bn.