Bank set to push QE to a trillion (and beyond)

THE Bank of England got the green light to print more money today when inflation fell to just 0.5% after a record fall in fuel prices.

The ONS said a near 17% plunge in fuel including petrol in May took the Consumer Prices Index to the lowest for four years, down from 0.8% in April.

That paves the way for the Bank to unveil a new round of quantitative easing (QE) – monetary stimulus that sees it invent money electronically to be spent on buying up government bonds from financial institutions.

Since March, the Bank has earmarked £200 billion of QE, taking the total on its books to around £650 billion.

City economists now expect the Bank’s QE balance sheet to expand past £1 trillion, with £100 billion of QE announced tomorrow, the same in July and August and a smaller amount in September.

Paul Dales at Capital Economics said: “May’s further fall in inflation is probably only the beginnings of a prolonged period of very soft price pressure that we think will prompt the Bank of England to announce a total of £350bn more QE, starting with £100bn (or maybe even £150bn) at tomorrow’s policy meeting.”

Some members of the Monetary Policy Committee, notably Michael Saunders, have suggested the Bank might as well do the same amount of QE in one “big bazooka” attempt to boost the economy. Saunders says the Bank must be “aggressive”.

Interest rates are at 0.1% and set to stay there, but Bank governor Andrew Bailey has admitted that negative rates are a possibility at some point.

It wasn’t just fuel that led to lower inflation. There were lower prices on almost everything, including clothes, shoes and painkillers.

Some fear massive QE will later lead to inflation, though that is not a concern at the moment since the UK is probably in the midst of the worst recession in modern history.

Neil Birrell, chief investment officer at Premier Miton, said: “Even though the long term impact of government and Bank of England policy might be inflationary, there will be no signs of it in the current environment as the May data shows, which was in line with expectations. Inflation is not something that is going to worry the Bank for some time, it will be more concerned about growth.”

Jeremy Thomson-Cook, chief economist at Equals, said:

“Inflation remains well below the Bank of England’s target here in the UK, running at 0.5% in May. This is no great hindrance to the UK’s economic performance but more a sign that input prices – oil and other industrial commodities – have swan-dived in recent months. Demand remains perilously weak; you don’t get inflation without demand. When inflation does starts to rise, absent some spike in commodity prices, it will be a positive thing.”