Ignis Asset Management chief economist Stuart Thomson says QE3 is not likely in the near term, but he believed the Fed would be forced to pursue additional quantitative easing during 2012.
Fearing political decisions were hampering a recovery which would be made easier if the Fed agreed to early QE3, Thomson expects the Federal Reserve Bank to resume unconventional monetary policy at its November or February meetings but warned the UK should pursue QE3 before the US.
“The key question is whether the UK will lead or follow the US,” he said. “We believe that the UK should pursue QE before the Fed, because fiscal austerity is more acute in the UK and the requirement for loose monetary policy to offset this economic squeeze is consequently more pressing.”
He also criticised the Bank of England’s growth forecasts as “too optimistic”, believing UK growth will slow to 1.1%.
“The MPC lowered its outlook for growth over the near term but maintained its Goldilocks scenario that the private sector will overcome the substantial fiscal drag and return growth to trend within the next couple of years,” he said. “We believe that this false optimism is more damaging to the central bank’s credibility than its inflation errors.”
He explained the central bank had repeatedly lowered its estimate of growth over the past year as activity had disappointed forecasts.
“This forecast has been lowered once again from 1.8% to 1.4%,” he said. “We are more pessimistic on the basis that economic data and sentiment is much more subdued.”
