MPC to pump £50bn into economy

Published on Saturday 31 October 2009 13:56

BRITAIN'S failure to exit recession will this week push the Bank of England into increasing quantitative easing (QE) by as much as £50 billion, according to leading economists.

Fears the UK is being left behind as a string of other major economies, including the US, France and Germany, return to growth are expected to persuade the Monetary Policy Committee to extend QE well beyond a current 175bn target.

The City is braced for the MPC to pump an additional 25bn to 50bn into the system on Thursday. Several leading economists including Jonathan Loynes of Capital Economics and George Buckley at Deutsche Bank expect the MPC to storm ahead with a 50bn injection in an effort to end the UK's longest recession on record.

"The MPC has tended to be quite bold with QE decisions so far," Loynes told Scotland on Sunday. "The news on the economy has generally continued to disappoint. The UK was still in recession in the third quarter while most of its competitors have emerged."

The blow of Britain's third-quarter GDP figures, showing the economy shrank by 0.4 per cent between July and September, was compounded last week when the US became the latest developed nation to declare an end to its recession.

There are mounting concerns that Britain has been left on the back foot while the rest of the global economy has swung back into gear, with shadow chancellor George Osborne last week declaring: "Britain now stands out as the only major economy still in recession."

Broker Charles Stanley said western industrialised economies were far from "out of the woods". It said the UK economy remained in very poor health and was clearly lagging the economic revival apparently under way in France, Germany, elsewhere in the EU and the US.

In a note it said: "If pressed, we believe that the Bank will vote to extend QE by a further 25bn and, as an outside bet, possibly by even more."

Howard Archer, chief UK and European economist at IHS Global Insight, said the minutes of the MPC's last meeting at the beginning of October indicate that committee members would have been caught off guard by the latest GDP data, published ten days ago.

Archer said: "The minutes of the October meeting clearly indicated that the MPC expected the economy to have grown in the third quarter."

The charge to increase QE is expected to be led by the bank's governor Mervyn King, who was one of the three MPC members to vote in favour of an extension to 200bn in August.

In a recent interview with Scotland on Sunday's sister paper The Scotsman, the Bank's deputy governor Paul Tucker said the Bank would be prepared to increase QE if it was deemed necessary.

Although there are still some doubts over the effectiveness of QE, Hetal Mehta, adviser to the Ernst & Young Item Club, said the committee needed to be seen to be taking action in the light of disappointing GDP figures. She said: "It's better to err on the side of caution and do something. But for most of October people were thinking the QE ship had run its course."

Economists widely expect the Office for National Statistics, which publishes GDP data, to improve its forecast, but Mehta said it would still be in the bank's best interests to extend QE. She said: "Even if there is some upward revision we are certainly not running out of this recession at a particularly fast pace."

David Kern, chief economist at the British Chambers of Commerce, has called on the QE stimulus to be raised immediately to at least 200bn, with the option of additional increases later on.