The investment bank said it expects the MPC to restart its programme of QE at today’s meeting to discuss interest rates, with £50bn of asset purchases.
Morgan Stanley added that there was also an increased risk of a rate cut although it wasn’t its central case.
It said that the Bank of England had already left “wriggle room” for more QE in its May Inflation Report.
The May MPC meeting minutes also revealed that the decision not to vote for more QE was finely balanced for “several” members. Morgan Stanley assumed this meant at least three.
The bank added: “We are not convinced that QE2 has been a success. The evidence, in our view, is consistent with diminishing returns from QE.
“Cutting interest rates to 0.25% and/or the remuneration on reserves are well ‘worth a try’ in our view.
“We think that a rate cut would have only a modest positive impact on the economy but we do not think that the arguments against cutting rates are strong.”
The research report said that Morgan Stanley expects the government to further leverage its balance sheet, for example by extending the scope of its credit-easing policies in areas such as housing and infrastructure.
