The Bank of England is finally catching a break. With Britain’s economy officially in recession, the BoE had been constrained from further monetary easing by a stubbornly high inflation rate. But as the global economy stumbles and Europe’s crisis rages unabated, UK price pressures may be giving way.
Barclays economist Chris Crowe argues:
We expect the MPC to announce an additional £50bn in QE at the July policy meeting.
CPI inflation fell to 2.8% y/y in May (Barclays 3.1%, consensus 3.0%) from 3.0% in April. Meanwhile, RPI inflation declined to 3.1% y/y (Barclays and consensus 3.3%), from 3.5%. With near-term inflationary pressures easing, the case for additional QE in response to faltering confidence is stronger.
The sense that further stimulus is forthcoming follows a decision last week to offer 100 billion pounds in cheap long-term funding to banks and minutes from the BoE’s last policy meeting showing a very close 5-4 vote against more quantitative easing. Significantly, Governor Mervyn King voted in favor.
The pullback in inflation may just be enough to tilt the balance.