Uk: Bank of England faces cash boost decision
- Credit: PA
Bank of England policymakers will decide today whether to inject billions more pounds of stimulus into the UK economy or to hold off amid tentative signs of a recovery.
Economists expect the Bank to refrain from a further round of quantitative easing (QE) this month following 0.3% gross domestic product growth in the first quarter and encouraging indications from industry survey data in April.
Such flickers of optimism may persuade the nine-member Monetary Policy Committee (MPC) to stick with its current asset purchase scheme of £375 billion, while holding interest rates at the record-low of 0.5%.
The rate-setters might also wish to wait and see the impact of the Bank’s newly beefed-up Funding for Lending scheme, now focused on helping small and medium businesses to borrow much-needed working capital.
Markets have been buoyed in recent days by monetary stimulus in the shape of interest rate cuts and QE by other central banks, with the Dow Jones Industrial Index soaring above 15,000 points for the first time and the FTSE 100 reaching levels not seen since December 2007.
In Britain, the MPC has been split about whether to boost asset purchases.
Minutes of its meeting last month showed governor Sir Mervyn King, with fellow policymakers David Miles and Paul Fisher wanted to increase QE by £25 billion, as Britain appeared to teeter on the brink of a triple-dip recession.
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They failed to win support from the rest of the committee over fears that it might exacerbate rising inflation and prompt renewed weakness in sterling.
The economic picture has since changed, with optimism picking up after official data showed muted but better-than-expected growth for the first quarter.
Meanwhile surveys for April showed the powerhouse service sector leaping ahead again while the beleaguered construction and manufacturing industries looked to be on the verge of a return to growth.
However despite the positive signs, some economists believe persistent weakness - coupled with the risk that the eurozone crisis could snuff out any nascent recovery - mean the Bank will have to resume QE - though possibly not until after the arrival of new governor Mark Carney in July.
Howard Archer of IHS Global Insight pointed out that the MPC would have the Bank’s new GDP growth and consumer price inflation forecasts available at today’s meeting, which could alter the long-term picture.
He said: “Despite the recent improved news on the UK economy, we believe it is still more a question of when the Bank of England will pull the Quantitative Easing trigger, rather than ‘will they?’
“The economy is still far from buoyant and with fiscal policy tight and global growth muted and stuttering, there is still a strong case for further support.”
But Philip Shaw of Investec said there was now “less urgency” for the Bank to restart asset purchases.
He said: “The 0.3% quarterly increase in GDP in the first quarter, while arguably not making a material change to the outlook, has taken some of the pressure away from the committee to do something now on the economy.”