The “MPC-ometer” statistical model predicted that the Monetary Policy Committee would ease policy in June, either cutting Bank rate to 0.25% or embarking on a further £75 billion tranche of QE – see previous post. The model was wrong but today’s minutes confirm a major dovish shift – there was serious discussion of a Bank rate reduction, four members voted for an immediate resumption of QE, while others agreed that further easing was likely to be warranted but favoured a tactical delay (pending inflation news, Eurozone developments and the outcome of the Financial Policy Committee meeting in late June).
The latest reading of the “-ometer” – incorporating new data on CPI inflation and average earnings growth as well as market developments and the vote revealed today – is essentially unchanged from just before the June meeting. With the MPC judging a Bank rate cut to have no advantage over more QE, according to the June minutes, a £75 billion extension of gilt purchases seems likely next month, assuming that the Committee does not regard recently-announced liquidity provision measures (i.e. extended collateral term repos and the “funding for lending” scheme) as a partial substitute for monetary easing. A £75 billion programme could be spread over four months to allow a review in conjunction with the November Inflation Report forecasting round.
In the first extended collateral repo conducted today, the Bank of England allotted £5 billion at a clearing spread equal to the minimum 25 basis points over Bank rate. The suggestion that demand for funds was not strong is consistent with the view here that the six-month tenor of the loans limits their attraction for banks facing medium-term funding difficulties – see previous post.