There is an outside chance that the MPC will surprise markets with a further slug of QE tomorrow:
-
The "MPC-ometer" – a statistical model designed to predict the monthly decision based on incoming economic and financial data – has a slight easing bias, reflecting recent weakness in business and consumer surveys and low average earnings growth. The latest reading is consistent with a further £25 billion of asset purchases. (The model calibrates this to be equivalent to an 8 basis point cut in Bank rate.)
-
Eight of the nine members of the Sunday Times Shadow MPC favour more QE (although two of these individuals, bizarrely, also voted for a half-point rate hike this month). The Shadow Commitee has often mirrored MPC thinking.
-
Adam Posen's decision to come out for more QE last week just ahead of the start of the October deliberations suggests that he is confident of support from other MPC members and wanted to exert pressure on waverers.
The key reason for expecting the MPC to hold back is that short-term inflation prospects have deteriorated further – a combination of high VAT pass-through, rising food and gas costs and renewed upward pressure on petrol prices could push the headline CPI rate up towards 4% over coming months. This increases the risk that more QE would boost inflationary expectations, a consideration that may weigh with the majority.
Continuing the recent run of poor inflation news, the annual rates of increase of the BRC food and non-food shop price indices firmed in September – the first chart shows the relationship with the corresponding CPI components. Higher wholesale petrol costs and the October hike in fuel duty, meanwhile, suggest a rise in the average price of a litre of unleaded back towards £1.20 – second chart.
