The Bank of England should sit on its hands this month, but be prepared to unleash a round of quantitative easing over the next month if the eurozone debt crisis gets worse, according to The Times’s Shadow Monetary Policy Committee.
The majority of the committee of nine voted for “no change” to interest rates or QE as they believe that not much can be done before the Greek elections on June 17.
Rupert Pennant Rea, chairman of Henderson, said: “This month the Monetary Policy Committee should confine itself to emphasising that it is ready to use every lever of its blessedly independent monetary policy to mitigate the consequences of external shocks; but right now, it has decided not to change either interest rates or QE.”
Charles Goodhart, of the London School of Economics and a former member of the MPC, believes that if the situation in Europe worsens, there will be a need for the Bank to react, but added that it will not know how bad, or good developments may be until after June 17. “I would much rather wait to decide whether a response is needed, and if so, what form it should take, until next month,” he said.
However, Michael Saunders, UK economist at Citi and Sushil Wadhwani, a former member of the MPC, have called for a quarter-point cut to interest rates and for the Bank to print more money. “UK economic indicators over the past month have mostly been disappointing. The prospects for the euro area have continued to deteriorate, given the increasing likelihood of Greek exit,” said Mr Wadhwani.
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Sir John Gieve, a former deputy Governor of the Bank, said that in advance of the Greek elections, he would leave interest rates unchanged but would look again at ways of stimulating credit to industry, which could include a version of QE with the Bank buying private sector debt as opposed to just Government debt.