Bank of England poised for another £50bn QE injection as economy stalls

By GARETH MACKIE
Published on 01/07/2012 00:00

BANK of England governor Sir Mervyn King and his fellow Monetary Policy Committee members are this week expected to pump a further £50 billion into the ailing British economy in another attempt to kick-start a recovery.

There is an outside chance that the MPC could cut interest rates on Thursday, after minutes from its last meeting showed members had discussed the merits of lowering the base rate from its current record low of 0.5 per cent.

However, the MPC said it was concerned that cutting rates would hit banks’ profit margins and constrain their ability to lend, and a reduction in borrowing costs would not have any advantages over expanding its asset purchasing programme from its current level of £325bn.

Enthusiasm for more quantitative easing (QE) grew last month, with four members of the rate-setting committee voting for an increase, compared with just one at its May meeting.

Of the four who backed more QE, Paul Fisher, the Bank’s executive director for markets, wanted a £25bn increase, while three members – David Miles, Adam Posen and King – voted to lift asset purchases by £50bn to £375bn.

Analysts at Charles Stanley said King would be “determined to get his way” this week and make sure the Bank could not be accused of complacency if Eurozone banks fail and contagion spreads to the UK’s banking sector.

Last week the Bank sold £5bn of cheap loans under its new extended collateral term repo (ECTR) facility, which is designed to give banks extra cash to limit damage if other sources of finance dry up.

The ECTR lets banks borrow funds in return for lower- quality assets than they would usually be able to use, such as residential mortgage-backed securities, credit-card debt, and student and consumer loans.

The Bank of England and the Treasury have also announced plans to give banks access to around £80bn in additional funds at a discount to market rates, but only if they increase lending to the non-financial sector.

Howard Archer, chief UK economist at IHS Global Insight, said: “With latest economic data and surveys largely grim, the outlook uncertain and troubling, the Eurozone crisis continuing and latest inflation developments largely favourable, we believe that a majority of MPC members will decide that more QE is now warranted and justifiable.”

Although inflation remains above the Bank’s 2 per cent target, the consumer prices index eased to 2.8 per cent in May, down from 3 per cent the previous month.

Figures last week showed that growth in the services economy, which accounts for some 77 per cent of total economic activity, had stalled in April. Archer added: “We suspect that latest developments are likely to prod at least one more MPC member into favouring more QE in July, and expect a £50bn extension to be announced.”