Eurozone fallout could force Bank of England to print more money

By SCOTT REID
Published on 24/05/2012 00:00

FURTHER fallout from the euro-zone crisis is likely to prompt a fresh bout of money printing by Britain’s central bank, economists said yesterday, while business leaders questioned the effectiveness of such quantitative easing (QE).

Minutes from the Bank of England’s latest meeting showed a unanimous vote in favour of holding interest rates at their record low of 0.5 per cent.

Just a single member of the nine-strong monetary policy committee (MPC) voted for an extension to the Bank’s QE programme, currently pegged at £325 billion.

However, for several members, the decision not to expand the asset purchasing was “finely balanced”, the minutes noted.

Governor Sir Mervyn King has already left the door open for further easing when he presented the Bank’s quarterly inflation forecasts last week.

Underlining this, deputy governor Charlie Bean said in a speech yesterday that the Bank may need to resume asset buying if economic conditions deteriorate sharply.

Samuel Tombs, UK economist at Capital Economics, said: “It still looks like it won’t take much to tip the committee into doing more QE.”

The British Chambers of Commerce (BCC) said the worsening eurozone crisis had heightened the risks facing the UK and conceded that further QE may be necessary.

But David Kern, chief economist at the BCC, also called on the bank to make better use of the existing liquidity created by QE. He said: “With growth now the key concern in the UK and Europe, the Bank of England must make a greater effort to help increase the flow of lending to credit worthy businesses.

“The MPC should reconsider its reluctance to purchase private sector assets rather than focusing exclusively on gilts.”

Earlier this week, International Monetary Fund head Christine Lagarde urged the Bank to purchase more assets – possibly including private sector bonds – or even cut interest rates further to practically zero.

Britain’s economy is still reeling from a protracted recession in 2008-9 and has now suffered a double-dip contraction, heaping pressure on the government, which faces criticism of its public spending cuts and tax hikes, aimed at erasing the deficit.

Base borrowing costs have been at 0.5 per cent for more than three years and are likely to remain at that level throughout 2013, analysts say.

Inflation remains a concern, though, despite easing back last month. In its quarterly forecast, the Bank warned that the main rate of consumer price inflation would fall more slowly than previously expected.

Glenn Uniacke, senior dealer at currency specialist Moneycorp, said inflationary pressures were starting to recede, providing scope for additional fiscal stimulus.

“The MPC vote of eight-to-one against further QE was categoric, but the chances of the money printing presses rolling again soon remain high,” he noted.

“Should the worst happen in the eurozone, any QE requirements will be changed beyond all recognition.”