Quantitative easing could resume in Britain during the opening months of 2011 if GDP growth starts to slow, Capital Economics has said.
Vicky Redwood, the consumer and debt specialist at the research house, notes that the Bank of England’s November Inflation Report did not rule out the Monetary Policy Committee (MPC) following the Federal Reserve in undertaking a second programme of quantitative easing at the start of next year.
Redwood adds that the MPC appears to be “very optimistic” in predicting that British GDP will grow by 3% over the next year in light of the impending fiscal contraction and suggests failure to meet this target could herald a renewed asset purchase programme.
“If we are right in expecting growth to slow to just 1% next year, the case for doing more QE should become more clear-cut,” she says. “Indeed, we still think that QE2 could be launched as soon as February.” (article continues below)
It remains to be seen if further quantitative easing can be balanced with inflation targets. The Bank is already expecting CPI inflation to return to 3.5% at the start of 2011 and admits it could exceed 2% target for the rest of the year.
When the Fed recently confirmed it would embark on QE2, there was a rally in global asset prices.
This led Julian Jessop, the chief international economist at Capital Economics, to suggest many economies would be struck by upward pressure on headline inflation.
He also claimed the Fed’s move had raised the risk of the financial markets “running ahead of themselves”, which the Bank would be keen to avoid in Britain.