The second round of QE has been completed and on Thursday the Bank has to decide whether to extend it again or to leave the total £325bn programme unchanged. Most economists reckon the Bank will keep its powder dry after inflation surprisingly rose in March to 3.5 per cent, making it less likely that the consumer price index will drop back to the 2 per cent target this year.
The Telegraph reports that Barclays Capital warned that inflation would prove “sticky” and that “the recent failure of inflation to fall as much as expected is indicative of a deep-seated persistence”. The bank expects inflation to remain above 2 per cent until the third quarter of 2014 and to remain above 3 per cent through this year. It has pencilled in a first rate rise of half a point in the third quarter of 2013.
Last month, Adam Posen, the Monetary Policy Committee (MPC) member who had been calling for more QE for a year before the rest swung behind him, switched tack and voted to leave the programme unchanged. His fellow rate setters also expressed concerns that “inflation would fall more slowly than assumed”.
Charles Goodhart, a former MPC member, said he expected the committee to “pause” QE until it became clear whether the eurozone would trigger another downward leg in the UK recovery. Sir John Gieve, a former Bank deputy Governor, added that the vote this month could be quite close given that, since the last meeting, official figures have shown the country dipped back into recession in the first quarter of the year.
The Bank has come under fire for punishing savers with record low rates of 0.5pc and reducing annuities through QE.