Curtains for quantitative easing? Bank of England set to turn off cash taps as it admits inflation is 'uncomfortably high'
19 April 2012
, by Adrian Lowery (MailOnline)http://www.dailymail.co.uk/money/news/article-2131462/Bank-England-set-pause-QE-admits-inflation-uncomfortably-high.htmlThe UK could have seen the last of quantitative easing because inflation is not coming down as far or as fast as expected, the Bank of England admitted today.
After the rate of inflation rate crept up yesterday to 3.5%, deputy governor Paul Tucker said that the news on inflation had been 'bad'.
'Though [inflation] has fallen significantly over the past six months, from over 5% to 3.5% on yesterday's reading, it remains uncomfortably above target,' Tucker said in a Liverpool speech.
Meanwhile, minutes to the Bank's April meeting showed that QE stalwart Adam Posen had surprisingly dropped his long-standing call for more stimulus, and that others were worried the Bank risked losing credibility regarding its commitment to keeping inflation under control.
The BoE said that the policy challenge it faced was thrown into 'sharp relief' by increased risks of high inflation over the past month.
'The upside risk to inflation, on the back of higher oil prices, has clearly thrown the MPC off guard,' said Nida Ali, economic advisor to the Ernst & Young ITEM Club, 'causing even Adam Posen to withdraw his call for more QE.'
'But with growth prospects now looking weaker than a couple of months ago, the MPC faces a major dilemma,' she added.
'In our view, the Bank is unlikely to authorise more QE in the coming months, especially in light of the latest oil price developments.'
Mr Tucker - who has said he has 'great sympathy’ for savers and pensioners affected by QE and price rises - said inflation was likely to stay a little higher than projected in the February Inflation Report in the short-term and might remain above 3% throughout the second quarter of this year and possibly into the second half.
In its February Inflation Report, the Bank predicted that inflation would fall below its 2% target towards the end of this year.
But food and oil prices prodded inflation up to 3.5% in March, from 3.4% in February, halting a five-month decline from a peak of 5.2% in September 2011.
Economists had not expected more QE next month, but most had not ruled it out later in the year after uneven signs on the economy's recovery in recent months.
George Buckley at Deutsche Bank said: 'The only thing that could sway [the MPC] back to more QE is next week's GDP figures and the PMIs. Those are the things to watch out for.'
The aim of the Bank's loose monetary policy was to boost economic growth, prevent a wave of mortgage repossessions and pump money into the flagging economy.But the whole QE project was called into question overnight by MPs who slammed the policy for destroying the incomes of pensioners and savers
damning Treasury select committee report laid bare how the Bank's £325bn in QE and ultra-low bas rate has had a crippling effect on annuity incomes and savings rates.
The committee even called for some sort of compensation for those hurt by QE, saying:
‘We recommend that the Government consider whether there are any measures that should be taken to mitigate the redistributional effects of QE.’
Tucker said the real economy is recovering broadly in line with the Bank's February forecasts, but the Bank's minutes admitted official data could reveal the UK economy is back in recession with a second quarter of GDP contraction
'Monetary policy will underpin the recovery so long as that remains consistent with anchoring inflation expectations in line with achieving the 2% target over the medium run,' he said. 'We shall not let that slip.'
Fellow policymakers Spencer Dale and Martin Weale have also voiced concerns over the inflation outlook and indicated their reluctance to back another round of asset-buying when the current £325bn QE tranche is completed in May.
The QE programme – which has been likened to printing money – started under Labour in 2009 and has continued under the Coalition.
The Treasury committee report highlighted how it has had the effect of slashing annuity rates, or ‘incomes for life’.
When a pensioner cashes in his savings for retirement, he is paid an annuity for the rest of his life.
In 1990, the average annuity rate for a 65-year-old man was an annual return of 16% of his pension pot. Today it is just 6%.
Thus a man who cashed in a £100,000 pension pot in 1990 would have got an annual income of £16,000.
A person retiring today, who had diligently saved the same amount, would get just £6,000 a year, an annual cut of £10,000.
The committee called on the Bank, particularly the nine men on its interest-rate setting committee, to ‘improve upon their efforts’ to explain their controversial policy to the country.
It says: ‘The policy of extremely lax monetary policy has not been without criticism. Under this policy, savers receive a far lower return on their savings than under more normal conditions
The report quotes Mr Tucker as saying he has ‘great sympathy’ for savers, but insisting the economy would have been ‘destroyed’ without the Bank’s action.