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King’s last MPC meeting: one last turn of the tap?

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  • 06/06/2013
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King’s last MPC meeting: one last turn of the tap?
Sir Mervyn King chairs his last ever Monetary Policy Committee (MPC) meeting today, but will his parting gift be one last blast of the QE tap?

The outgoing governor, to be replaced by Canadian Mark Carney on 1 July after two decades at the Bank of England, has been calling for an extension to the central bank’s quantitative easing programme.

This programme has seen the Bank buy £375bn of government bonds between March 2009 and October 2012. King and two other MPC members want to extend the bank’s asset purchase programme by an extra £25bn, to stimulate the economy.

In the minutes of February’s MPC meeting, it was revealed King and MPC member Paul Fisher voted in favour of boosting QE to £400bn, joining lone voice David Miles in calling for an additional £25bn of stimulus.

However, he has so far been overruled by his committee colleagues who are keen to see what the impact certain initiatives such as Funding for Lending will have on the economy.

Last week’s figures on the Funding for Lending Scheme, designed to kick-start growth by incentivising banks to lend to households and businesses, suggest it has had a limited impact. Banks took only £2.6bn more cheap funds in Q1 (taking the cumulative amount borrowed so far to £16.5bn), while net new lending by these banks to the private sector was negative.

However, better than expected data from the services sector yesterday offered a hint that the UK economy is now truly on the road to recovery. May CIPS/Markit report pointed to improvements in the manufacturing and construction industry, with the reading rising from 52.9 to 54.9, its highest level since May 2012.

Capital Economics suggested a weighted average of the three CIPS surveys points to the economy growing by about 0.5% in the second quarter. However, the research house does not expect the MPC to vote through more stimulus, but is anticipating a ‘wait and see’ approach in light of the recent data from the UK.

Howard Archer at IHS Global Insight expects the Bank will eventually greenlight more easing, but just not yet.

He said GDP growth pf 0.3% in Q1 and a services sector boost in Q2 are encouraging, investments, exports, and retail sales remain low as consumer spending is still weak.

“The June MPC meeting is Sir Mervyn King’s swansong, but he is unlikely to get his apparent parting wish for more monetary stimulus to try and help UK economic recovery gain traction,” he said.
 
“While we expect the Bank of England to eventually go for more quantitative easing, it seems more likely to come as a welcoming present sometime in the third quarter for incoming Bank of England governor Mark Carney than as a parting gift for Sir Mervyn King.”
 
Perhaps there are enough bright spots in the UK economy to put the brakes on further QE? Otherwise King’s parting gift to the country may be one last turn of the tap.

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