Few economists expect a further expansion of QE at this week’s policy-setting meeting but such an outcome is suggested by a model based on the MPC's historical reaction function.

The “MPC-ometer” uses 12 economic and financial indicators to forecast the monthly policy decision and has performed well since its introduction in 2006, except for several months in late 2010 and early 2011 when it predicted modest tightening – such a shift would have tempered the current inflation overshoot. More recently, the model signalled the launch of QE2 last autumn and its extension in February.

The model has maintained a dovish bias in recent months and shifted further in May, consistent with a £75 billion expansion being announced this week. This mainly reflects the 0.2% fall in GDP in the first quarter but declines in the PMIs and consumer confidence, a further slowdown in pay growth and weaker industrial pricing plans also contributed.

The consensus expects unchanged policy partly because the April minutes suggested that the MPC would ignore another GDP fall. This, however, assumed that the decline would reflect a large drop in construction output, with other sectors expanding. GDP excluding construction, in fact, was flat last quarter, questioning the Committee’s assumption of a pick-up in underlying growth.

The minutes also acknowledged a deterioration in the short-term inflation outlook but – as last year demonstrates – such a negative reassessment need not preclude further easing. The Committee still appears inclined to attribute disappointments to temporary “shocks", with the minutes stating that “(T)here was little solid evidence yet that the balance of risks to inflation in the medium term had changed.”

The MPC-ometer’s forecast assumes that the Committee will – as it has in the past – place more weight on activity than inflation indicators. An unchanged decision this week could signal that its reaction function is shifting in response to the prolonged inflation overshoot – the MPC, in other words, may judge that an increased threat of expectations becoming detached from the target has constrained its ability to respond to economic weakness.