BOE King hints of more QE if the CPI remains down
Meanwhile, BOE King is also on the newswires saying the BOE would do more QE if CPI were to remain down. The problem is inflation is expected to move back above the 2% level in coming months as the effects of a -0.1%, -0.4% and -0.7% decline in November 2008, December 2008 and January 2009 roll off in coming months. The January decline is a seasonal thing as UK businesses have post Christmas sales in January which tends to lead to a decline in that month. This year should not be any different. I would expect a similar decline. What the decline is will be important. It will be tough for the BOE to increase QE even if strongly needed, if a similar decline does not come in.
The positive news for inflation (and the BOE option) is in February of 2009, a gain of +0.9% will roll off the books from February 2008. This will likely bring inflation back down below 2%, and will once again open the window for BOE to increase QE provisions - if needed at that time.
As a result, it seems that paying attention to CPI will be a prerequisite to more QE but don’t expect any help over the next couple of months. The state of the economy will also be watched of course but likely to be a secondary consideration.
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