MPC vote has the City on tenterhooks over further cash boost

Published on Wednesday 4 November 2009 20:20

THE markets are on high alert today over whether the Bank of England will answer calls to extend quantitative easing (QE) by a further £25-50 billion.

The Bank's monetary policy committee (MPC) is understood to have faced the biggest split in its ten-year existence as business groups such as the British Chambers of Commerce (BCC) press for an urgent extension to QE.

Economists predict the doves on the committee, led by Bank governor Mervyn King, will narrowly win the vote on an extension but they say it will be a close-run result following a slew of contradictory economic data.

Disappointing GDP figures, which showed the UK economy did not exit recession in the third quarter, are expected to tip the balance in favour of a further 25-50bn lifeline.

But King's job of convincing more reluctant members, such as the Bank's chief economist Spencer Dale and Adam Posen, will have been made more difficult by the publication yesterday of better-than-expected data for Britain's services sector – which accounts for some 70 per cent of total UK economic output.

The latest purchasing managers' survey showed that the services sector last month had its best run since the onset of the credit crunch in August 2007.

The survey, from the Chartered Institute of Purchasing and Supply and research group Markit, sparked optimism that Britain would finally join other developed nations such as America and France in staging a return to economic growth in the final three months of the year.

Hetal Mehta, senior economic advisor to the Ernst & Young Item Club, said: "We started the final quarter with a bang, with both manufacturing and services PMI data showing increases in activity.

"This reinforces our view that the economy will return to growth in the fourth quarter."

However, Mehta added that yesterday's positive news will probably not be enough to calm nerves among members of the MPC, which is under pressure to give the economy one final shot in the arm to catapult it out of recession.

She warned that the economy was currently being propped up by short-term measures such as the car scrappage scheme.

Royal Bank of Scotland chief economist Andrew McLaughlin said that the Bank was likely to be swayed by evidence that the 175bn pumped into the economy so far had failed to radically improve credit supply problems.

McLaughlin said: "The case for more stimulus in the UK will be strengthened by signs that the 175bn of asset purchases are still not getting much 'bang for the buck' when it comes to credit growth or the money supply more generally."

David Kern, chief economist at the BCC, called on the MPC to make "every effort" to end the recession.

Yesterday's services sector survey showed a rise in the headline PMI index to 56.9 from 55.3 – the sixth successive month that it has appeared above the crucial 50 mark that represents growth. Economists had pencilled in a rise to 55.5.