Thursday, November 19, 2009
Doves versus the Hawks!
The latest minutes (November meeting) from the Bank of England's Monetary Policy Committee (MPC) highlight some clear divisions among its members in relation to the future direction of UK monetary policy. Seven members voted for the further £25bn boost to the quantitative easing (QE) programme which took the total to date up to £200bn. One dovish member (David Miles) actually wanted the QE to amount to some £40bn. In contrast one other hawkish member (Spencer Dale) wanted no further QE at all. These divisions reflect the wider view of the City economists. In recent weeks we have seen some of them arguing that we should do more to promote growth and that any inflationary threat was minimal. In contrast some others now feel that the Bank's actions have gone too far. They fear that we could see a serious rise in UK inflation next year. To be honest it is hard to decide which side of this argument that I feel most comfortable to support. There are clearly some inflationary pressures mounting reflected in higher oil prices and the more confident tone of the stock market. Against that there is clearly a risk that the economic recovery could hit the buffers during 2010. If that happens the risk of higher inflation will soon disappear. We live in interesting times!
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4 comments:
From my analysis of that week I think the doves are starting to get pushed back we have been going for the dovish approach for a long time but now the hawks have emerged and for good reason.
Recovery is among most with the uk eventually getting there the economy has gone through the same cycel of recession,recovery cycle for a while inflation could happen in 2010 but i do agree its hard to call I mean this wasnt your average recession it did claim some big victims but still in the history of things its another recession at the end of the day lead to recovery the cycle will always go one and inflation haws always been lurking in the mist but the scary thing is speculation and fear which is the driving factor behind it all.
The world of the economy could be considered a world of psychology even if people dont mean to they are one of the key factors which cause its rise and its fall through fear and speculation.
Reading the minutes of the Central Bank meeting concluded with maintaining bank rate at 0.5% and increasing size of Asset Purchase Programme by £25 Billion to £200 Billion. Also saying that they believe the economy is recovering, and growth is gradual. This is good news after all the volatile evaluations and future predictions given. Although in the Federal Reserve meeting the same week they stated that if the current economy growth rate doesn’t increase it is possible to experience double dip recession.
We were also made aware inflation is likely to rise sharply, above the 2% target in the near term, due to the current high petrol price inflation and the reduction in VAT last year. Therefore it is currently difficult to predict future economic conditions and at present all analysts hold distinct view as shown by the diverse voting in the Central Bank meeting.
Reading the minutes of the November meeting, I was surprise that the majority of MPC members. AS they have injected money into the economy several times during the year. For this reason, I believe the memeber who voted against the quantitative easing, projected reasonable behaviour with the fear that inflations increase rapidly.
However, with this injection may encourage consumers to spend as it has been forecast that inflation will raise to 2% due to the increase oil prices.
It is believed that if the MPC stop injected money into the economy, interest rate will be force to rise which would have an impact on the consumers' demand on goods and output, and employment level and prices on goods would be affected.
Despite the injection of £40bn can encourage consumer spending and new business start, but it might result in higher inflation in 2010 which is a big worried for the future economic growth.
As a result, I believed that £25 is a reasonable amount to inject although this might cause further inflation, but it shows the economy is gradually recovering due to the quantitative easing slowed down, moreover, stop the QE programme does not give rise to further inflation in 2010.
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