Bank of England expected to hold fire on further quantitative easing

BANK of England policymakers are likely to hold back from providing the economy with additional stimulus this week although a key snapshot of Britain’s powerhouse services sector could provide an 11th-hour trigger.

Analysts believe that if tomorrow’s purchasing managers’ index (PMI) survey is particularly weak it could convince members of the central bank’s monetary policy committee to vote in favour of more quantitative easing (QE). The report, compiled by the Chartered Institute of Purchasing and Supply and researchers at Markit,  follows last week’s weak manufacturing PMI and a better-than-expected reading for the construction sector.

Most economists changed their view on the likelihood  of further QE being launched before the end of the year following news that the UK had exited recession in the third quarter. The 1 per cent growth in gross domestic product  was stronger than forecast  and eased the pressure on the central bank and governor  Sir Mervyn King to extend  QE beyond the £375 billion  already spent on buying back gilts.

Economists say that rate- setters may also be reluctant to take further intervention as they await the impact of the Bank’s £80bn Funding for Lending scheme – designed to stimulate the economy by making cheaper loans available to firms and individuals.

Howard Archer, chief UK economist at IHS Global Insight, the forecasting group, said tomorrow’s PMI was likely to show service sector activity edging higher in October after a dip the month before.

He said: “While it still looks to be a close call, we believe that the spike in GDP in the third quarter, backed up by a strong CBI distributive trades survey for October, makes it more likely than not that the Bank of England will hold off from more quantitative easing at the November meeting of the MPC.

“Also supporting the case for the Bank to sit tight and monitor how the economy develops, the Funding for Lending scheme, which was launched  at the start of August, is still yet to feed through to take full effect, particularly with respect to lending to companies.”  Analysts at Investec Securities said the decision to inject further stimulus on Thursday was far from clear cut.

“On balance we expect the Bank to hold off sanctioning a further round of QE,” they noted. “Upward inflation pressures and optimism over the Funding for Lending scheme should provide just enough justification for holding fire.”

The British Chambers of Commerce renewed its call  on the Bank of England not  to increase QE but instead take measures to help boost lending to businesses.

David Kern, chief economist at the membership group, said: “Efforts must be made to ensure that the much-heralded Funding for Lending scheme benefits businesses in the real economy, and the government’s promise to establish a fully-fledged British Business Bank must be followed through without delay.”