Bank of England split over calls for QE

The Bank of England's monetary policy committee (MPC) is under growing pressure to deliver more stimulus to the economy, and is likely to be split three ways over its monthly decision today. The committee is widely expected to resist calls for another round of quantitative easing (QE) – pumping money into the economy, essentially – until a clearer picture emerges on the economy. But pressure for further action is rising amid fears of a renewed slowdown once the government spending cuts take effect. Elsewhere, the Bank of Japan cut its interest rates to virtually zero this week and pumped more cash into the economy, and the US Federal Reserve is expected to act soon. The UK housing market suffered a major jolt today as figures from the Halifax revealed prices slumped 3.6% in September - the biggest monthly fall since figures were first compiled in 1983. The mortgage lender said an increase in the number of properties on the market, combined with a drop in demand fuelled by uncertainty over the economy, forced prices down. However, Martin Ellis, housing economist at the Halifax, said it was too early to conclude that September's drop is the beginning of a sustained period of declining house prices. There is disagreement within the nine-member MPC as to how to proceed: Adam Posen has made it clear that he feels now is the time to pump more money into the economy. He has warned over a potential "lost decade" of stagnant growth, similar to Japan. However, the majority on the committee are not prepared to sanction any action yet, and City economists are predicting interest rates will be held at 0.5% at noon today, and that the QE programme will be left unchanged at £200bn. Inflation has remained stubbornly high, running at 3.1% in August, well above the Bank's 2% target. Economists believe a three-way split will emerge, with Posen opting for more QE and Andrew Sentance voting once more for a quarter-point rise in rates to combat inflation. Recent figures have painted a confusing picture, with the service and construction sectors showing surprise increases in growth last month, although orders worsened, while the manufacturing recovery continues to lose steam . The climate is expected to get far worse once the public spending cuts have been unveiled on 20 October. While the economy grew by 1.2% in the second quarter – its fastest pace for nine years – analysts believe growth will have dropped sharply to 0.4% or 0.5% in the third quarter. Malcolm Barr, at JP Morgan, said: "We continue to think it will be a close call as to whether a majority for more QE will form but have been influenced by a couple of things which will impact the context of the MPC decision. First is that the period from 20 October onward will likely be one in which the discussion of spending restraint and welfare reform becomes more concrete. Second is that the Fed are likely to announce more QE on the eve of the MPC's decision [ie the Fed is likely to go first]." Many Wall Street analysts expect the US central bank to unveil more economic stimulus on 3 November. The Bank of England's next meeting ends on 4 November. A survey of City economists by Market News International shows that while only five out of 30 are now predicting more QE, the probability of this happening is thought to have increased and analysts have pushed back their expectations of the Bank's first rate increase. Deutsche Bank's chief UK economist, George Buckley, has pushed back his rate hike call to the second quarter of next year (from the first), and put a 40% probability on more stimulus. The Institute of Directors and British Chambers of Commerce are calling for a £50bn extension of QE before the end of the year. Graeme Leach, chief economist at the IoD, said: "Monetary policy needs to help ensure a sustainable recovery is in place before the public-sector recession begins. Yes, inflation is above target now, but a double-dip recession would raise the spectre of deflation. At the present time the growth threat is more of a danger than inflation." Vicky Redwood, of Capital Economics, said it was unlikely that "developments over the past months will have been enough to prompt a majority vote for more stimulus this month" but forecasts more QE later this year or early in 2011. The Bank last increased QE in November, upping the asset-purchase programme from £25bn to £200bn. It has not changed rates for 18 months in a row, keeping them at a historic low of 0.5%.