Europe Economy

Markets Want Exit Strategy from BOE

Anjuli Davis, Assistant Producer, CNBC

The Bank of England is not expected to move this week as its Monetary Policy Committee meets to decide on rates.

Currently at a record low of 0.5%, those with vested interests will be watching out for news of its quantitative easing program. The bank has already stepped up purchases to the tune of £125 billion ($200 billion).

And talk of an exit strategy is pervasive in the markets.

“I'd liken this to Godzilla vs. King Kong where you have the Godzilla of the monetary authority spraying the landscape with liquidity and the King Kong of deflation," Niall Ferguson, professor of history at Harvard, told CNBC. "King Kong has the upper hand. We are in a deflationary global economy for the rest of this year and the numbers will bear that out."

But former MPC member Willem Buiter said he believes that inflation is a very clear and present danger.

“It’s not the volume of debt per se but the anticipation that over time debt will build up to levels that will not be reversible and this will lead to inflation,” Buiter said.

If the government’s strategy was not in fact to inflate its way out of its debt mountain it would only be issuing inflation linked gilts, he said.

"The government is acting in the opposite manner, not issuing inflation linked debt and that is worrying,” he added.

The only way to come out of the burden of debt is through inflation and “history tells us beware of inflation,” Ferguson said.

But Buiter said he doubts that the UK has the fiscal means and political will to be able to reverse its money printing policies in time.

There is going to be the need for severe fiscal consolidation after next general election in the UK, Jonathan Lynes of Capital Economics said. Tax rises and spending cuts will therefore mean the BOE may need to keep monetary policy loose for some time.

What markets really want is some sort of view from the Bank about where the economy is heading, Marc Ostwald, strategist at Monument Securities, said.

“Central Banks are there to give guidance," Ostwald said. "The outlook won’t clear up but during the lull period we need to think of how we can exit.”