Britain’s stronger-than-forecast exit from recession with the fastest growth in five years in the third quarter has reduced the chance of the Bank of England expanding stimulus next month, economists said.
Citigroup Inc., Barclays Plc and Investec Securities abandoned forecasts for more quantitative easing in November, while Capital Economics said today’s gross domestic product data may “tip the balance towards the Monetary Policy Committee holding fire at its upcoming meeting.”
The economy’s 1 percent surge, which exceeded even the top estimate in a Bloomberg News survey, came two weeks before the MPC must decide whether to expand its stimulus program beyond 375 billion pounds ($605 billion). Some officials have indicated a reluctance to loosen policy further, with Martin Weale saying this month that he’s uncertain whether more QE is the right thing to do with inflation above the central bank’s target.
“In light of these developments, as well as recent signs of additional inflation stickiness, we now think it is unlikely that a majority of the MPC will support additional QE in November,” Barclays economists including London-based Chris Crowe and Simon Hayes said in an e-mailed note to clients. “In the absence of a renewed stalling in the recovery, we expect this month’s asset purchases to be the last.”
Crowe and Hayes also cited “more optimistic” comments from Bank of England Deputy Governor Charles Bean and Markets Director Paul Fisher as a factor in their decision to drop a forecast that the central bank would expand stimulus by 50 billion pounds next month.
‘Past the Worst’
“I think we’re past the worst,” Bean told the North Wales Daily Post in an interview published today. “The expectation is growth should be picking up.”
The Western Mail reported that Fisher said the economy isn’t “falling off a cliff” and the BOE’s bond-purchase plan was “not causing any domestic inflationary pressure, but it could do if the economy started to grow again.”
Citigroup economist Michael Saunders today dropped a prediction of an increase in stimulus on Nov. 8, while JPMorgan Chase & Co.’s Malcolm Barr changed his forecast from a 50 billion-pound expansion to 25 billion pounds.
“Even though the gain in GDP in part probably is temporary, we no longer expect the MPC will expand QE further,” Saunders said. However, “we do expect the MPC will expand QE markedly further over time, but the next move probably will be delayed beyond November.”
Economist Philip Shaw at Investec said the decision to pull his forecast for a 50 billion-pound expansion next month was only “marginally” due to today’s GDP data, with inflation the dominant factor. Nomura International Plc economist Philip Rush changed his QE forecast yesterday and now sees an expansion of the program in February rather than November.
While the pace of consumer-price increases slowed to a three-year low of 2.2 percent in September, Governor Mervyn King said earlier this week that recent rises in the cost of energy and food mean inflation will stay “a little” above policy makers’ 2 percent goal into next year.
The third-quarter GDP surge was partly due to a rebound from a second-quarter slump and the impact of the Olympic Games. The National Institute of Economic and Social research estimates that underlying growth is about 0.2 pecent to 0.3 percent. Still, there are positive signs, with retail sales increasing more than forecast in September and payrolls rising to a record in the quarter through August.
“At the margin, the upside news reduces the probability of further asset purchases being announced next month,” said James Ashley, an economist at RBC Capital Markets in London. “But, for now, we still think that, on balance, an extension is more likely than not” in November.