The BoE's Monetary Policy Committee is likely to be split three ways in today's interest rate and QE decisions, but which is the best path to tread?
We ask three high profile figures to discuss whether the Bank should leave rates and QE at current levels - or should the MPC follow hawk Andrew Sentance in hiking interest rates or dove Adam Posen in further stimulating the economy.
Henderson chief economist Simon Ward
The economy has grown more strongly than expected this year, inflation remains well above both the target and the Bank of England's forecast, while financial conditions continue to normalise. Money supply expansion is modest but the velocity of circulation is picking up, implying ample monetary fuel to power an ongoing economic recovery.
It was right to cut Bank rate to 0.5% and embark on QE amid the economic and banking crisis of early 2009 but an emergency policy stance is no longer warranted. Without early action, the inflation overshoot may become entrenched and there is a risk of new asset price bubbles and subsequent disruptive busts.
Ignis fund manager and chief economist Stuart Thomson
We believe the Monetary Policy Committee will resume quantitative easing by February. The Government has made it clean that plan B is the Bank if the private sector does not respond positively to fiscal austerity. However, we also believe that the central bank should re-start unconventional monetary policy in November following the expected acceleration of government bond purchases by the US Federal Reserve at its FOMC meeting on 3 November.
However, it is doubtful whether Governor Mervyn King will be able to persuade hawks such as Andrew Sentance of the need to pre-empt the fiscal austerity in the New Year. This suggests that consumer spending and employment will contract over the next twelve months and that the Bank will be forced to react to the weakness to support activity.
Cazenove chief investment officer Richard Jeffrey
Having reduced interest rates too far in response to the banking crisis, the MPC now finds itself trapped in a policy cul-de-sac - like the HGV driver who has relied on his satnav system rather than studying a proper map. While I can understand why Andrew Sentance is arguing for higher interest rates, inflationary pressure is likely to diminish next year without a monetary tightening, as weaker growth in household spending results in greater competitiveness on the high street. Indeed, with household disposable income currently declining in real terms, raising interest rates could cause the feared double dip to become a reality.
But this does not mean that a further round of quantitative easing is appropriate. Pumping liquidity into the system has created asset price inflation (most obvious in bond markets), but it has had negligible impact on the real economy. This is because adding liquidity does not change the perceived riskiness of lending to households or smaller companies. In fact, if the UK economy is to rebalance, it must endure a period of sub-trend growth in domestic demand. And after the sequence of policy mistakes made over the past ten years, the members of MPC would be best advised to sit on their hands.
What made financial headlines over the weekend?
To promote 'long-term investment'
Switching 'hard and expensive'
Smaller funds still packing a punch