Pressure for more QE piles up on the Bank of England

By GARETH MACKIE
Published on 04/06/2012 02:27

PRESSURE is mounting on Bank of England governor Sir Mervyn King to push the button on another dose of emergency money printing amid an increasingly gloomy economic environment.

The Bank of England’s monetary policy committee (MPC) is widely expected to leave interest rates at their record low of 0.5 per cent this Thursday, but analysts believe it could add a further £50 billion to the £325bn stock of quantitative easing (QE) if a closely-watched survey shows a contraction in Britain’s powerhouse services sector.

Fresh figures released in China yesterday showed expansion within its services industries had slowed for the second straight month in May, just days after twin surveys of its vast factory sector signalled a deterioration in demand at home and abroad.

Many analysts expect China’s annual economic growth to fall to 7.9 per cent in the second quarter, which would be the first dip below 8 per cent since 2009.

The gloomy mood was not helped by official figures on Friday showing US employers added just 69,000 jobs in May, the lowest number in a year and the third straight month of weak job growth.

Howard Archer, chief UK economist at IHS Global Insight, said yesterday: “There is very real and mounting pressure on the MPC to revive QE – and sooner rather than later.

“Latest economic activity news has largely taken a turn for the worse, while inflation developments have been more favourable. Meanwhile, events in Greece and Spain are magnifying the uncertain and worrying economic outlook.”

Archer also said the extra public holiday for the Jubilee celebrations could hit second-quarter GDP, although lost activity could be recouped in the third quarter, which will also benefit from the Olympics.

The MPC decided not to extend QE at its May meeting because of concerns over rising consumer prices, but the rate of inflation fell in April, providing more leeway for a fresh injection of money.

There is even a small chance the MPC could cut interest rates below 0.5 per cent after International Monetary Fund boss Christine Lagarde called on the Bank to lower rates further to help the UK weather the eurozone debt crisis.

Figures last week showed there was a shock contraction in the UK manufacturing sector, with the purchasing managers’ index suffering the second biggest decline in its 20-year history.

Philip Shaw, chief economist at Investec, believes the manufacturing decline may have unnerved the MPC but it was not “a game changer”. However, a similar trend in the services sector, which makes up some three-quarters of the economy, would be “a different story”.

Simon Hayes, an analyst at Barclays Capital, said: “If the services sector PMI published on Thursday morning were to show a similarly precipitous fall, the MPC is likely to give serious consideration to a QE expansion.”

However, the City expects Markit data for the services sector to show a slowdown in growth rather than a contraction.

Pressure on the Bank to implement more stimulus measures has been mounting in recent weeks after official figures showed the UK’s double-dip recession was deeper than previously thought, with a 0.3 per cent fall in the first quarter of 2012.