The MPC voted 8-1 for the cut of half a percentage point in Bank rate earlier this month, with David Blanchflower again dissenting in favour of a full-point move.

The fact that only Blanchflower wanted a larger reduction, despite Inflation Report forecasts showing annual CPI inflation well below target over the medium term, is significant. Most MPC members appear to accept that a further cut in Bank rate would provide little additional stimulus and might even have an adverse economic impact by reducing banks’ earnings and lending capacity. (This argument was made in an earlier post.)

Quantitative action rather than Bank rate cuts must therefore bear the burden of further monetary easing. The surprise here is that the Committee has already instructed the Governor to seek Treasury authority to conduct purchases of gilts and other securities financed by creating new bank reserves. Assuming approval is granted, a decision to begin unsterilized buying is likely to be taken at the next meeting on 5 March.

My MPC-ometer, like the consensus, predicted the half-point February decline. The model is not able to incorporate the diminishing effectiveness of reductions as Bank rate approaches zero so may overestimate the MPC’s inclination to cut further. It currently suggests a quarter-point fall at the March meeting; as always, consumer and business surveys released around the end of the month will be an important influence on the final forecast.