UK: Bank of England leaves monetary policy on hold

The Bank of England in the City of London

The Bank of England in the City of London - Credit: PA

THE Bank of England again held off from more emergency support today as policymakers wait to see if the economy managed to grow in the first quarter.

The central bank kept its quantitative easing (QE) programme steady at £375billlion, opting against more stimulus amid tentative signs that the economy is set to return to growth.

The bank’s Monetary Policy Committee (MPC) also kept interest rates at their record low of 0.5%, where they have sat since March 2009.

Stronger-than-expected figures from the dominant services sector today lifted hopes that the economy grew between January and March. That would mean the UK narrowly avoiding a triple-dip recession, and ease pressure on the bank to pump more money into the economy.

However, some economists believe the bank will need to resume QE in coming months as Britain’s anaemic recovery struggles to gain momentum.

Allan Monks, economist at JPMorgan Chase Bank, expects more action next month: “Given the weak euro area backdrop, we believe the UK data would need to improve more decisively to talk the MPC out of doing more next month.”

The vote by the MPC’s nine members is likely to have been finely balanced. Outgoing Bank Governor Sir Mervyn King and fellow rate-setters David Miles and Paul Fisher repeated calls for another £25bn of QE at last month’s meeting, but were voted down over fears of the impact on the pound.

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Stephen Gifford, CBI director of economics, said: “While muted growth prospects and international uncertainty will keep open the possibility of further QE, the persistence of above-target inflation may act as a bar to looser policy.”

The Bank of Japan said today that it would massively expand the country’s money supply with a QE programme to create inflation and lift the country out of its long economic malaise.

It joins the Bank of England, the US Federal Reserve and other major central banks in pumping money into the economy with the aim of getting companies and households to increase spending and lift Japan’s stalled economy.

Britain’s economy was given a boost today when the closely-watched Markit/CIPS purchasing managers index showed better-than-expected performance in March from the services sector, which makes up more than three-quarters of the economy.

Samuel Tombs, UK Economist at Capital Economics, said: “It was fairly unsurprising that those members who voted for more asset purchases in previous meetings were unable to muster a majority today. For a start, the economic data have generally improved since the last meeting, albeit marginally.”

“In particular, the PMIs of all three of the CIPS/Markit business surveys edged up in March, while retail sales grew strongly in February.”

However, he added: “Despite this, we think that the current stasis will not last long. Although the MPC may be braced for a disappointing Q1 GDP figure, we doubt that the recovery will suddenly strengthen and match their expectations for later this year. And we still think that the large amount of spare capacity in the economy will mean that inflation falls more quickly next year than the MPC currently expects.

“Meanwhile, we suspect that Mark Carney’s arrival in July could herald a change of course. Granted, he has only one vote out of nine. And given that he is replacing Sir Mervyn who is already voting for more stimulus, the number of members voting for looser policy will not swell immediately.

“But, given his past comments, he will probably be keen to press ahead with the forward guidance that the Chancellor gave the green light to in the Budget.”