Central bank to hold its nerve as inflation fears outweight risks

By SCOTT REID
Published on 11/01/2013 00:00

Bank of England officials are likely to sit on their hands in the near term, say experts, despite fears that the economy is sliding towards another recession.

The “wait and see” stance was forecast after the central bank held the interest rate at its record low of 0.5 per cent and maintained its quantitative easing (QE) programme at £375 billion.

Concerns about persistently sticky inflation are likely to have dissuaded members of the Bank’s monetary policy committee (MPC) from taking further action this month. There have also been signs that the £80bn Funding for Lending scheme, which is backed by the Bank and the Treasury, is having a positive impact.

However, the no-change decision comes amid fears that the UK economy slipped back into the red in the final quarter of 2012 following figures suggesting the dominant services sector contracted in December for the first time in two years.

Anna Leach, head of economic analysis at the CBI, said a change in policy at the MPC had been unlikely this month given the “mixed signals” on the economy.

“Underlying economic conditions remain fairly flat and there are early signs that credit availability is being boosted by the Funding for Lending scheme,” she said.

“We’re not expecting any change in monetary policy over the next few months, unless compelling evidence of a renewed downturn emerges.”

Stephen Boyle, head of group economics at Royal Bank of Scotland, said: “I would have been very surprised if the MPC had shifted monetary policy as little had changed since its last meeting. The committee places considerable store by the Funding for Lending scheme.”

A gloomy report from Markit economists recently estimated UK gross domestic product (GDP) contracted by 0.2 per cent in the final quarter of 2012 in a marked reversal of the 0.9 per cent growth the previous three months.

Unless the opening months of 2013 prove more resilient, the economy could be heading for two consecutive quarters of declining output which would mark a triple-dip recession.