Bank of England likely to postpone further QE

Signs of a recovery in the economy and a recent revamp of a flagship lending scheme have reduced the likelihood of the Bank of England embarking on further fiscal stimulus this week.

Sir Mervyn King and the Bank of England MPC are not thought likely to increase QE this month. Picture: David Jones/PA
Sir Mervyn King and the Bank of England MPC are not thought likely to increase QE this month. Picture: David Jones/PA

Rate-setters at the bank’s monetary policy committee (MPC) look almost certain to hold off launching a fresh round of quantitative easing (QE) when they vote on Thursday.

It comes in the wake of last week’s triple dose of upbeat purchasing managers’ indices, covering the construction, manufacturing and dominant services sectors. That followed news that the UK economy had grown by a surprisingly robust 0.3 per cent in the first quarter, thereby avoiding a so-called “triple-dip” recession.

Economists expect that the solid GDP figure will be enough to persuade the Bank to maintain asset purchases at £375 billion, while also holding interest rates at their record low of 0.5 per cent.

Britain’s protracted economic malaise has forced policymakers to look for alternative ways of instilling growth, including the Funding for Lending Scheme (FLS), which aims to increase credit for households and companies by giving banks an incentive to lend to them.

Policymakers recently beefed up the FLS by increasing the amount of low-interest funding that banks can access – providing they lend it on to smaller firms.

They also widened the scheme to take in finance houses and leasing corporations that target small companies.

The FLS overhaul and recent encouraging signs from the economy should be enough to keep the nine-strong MPC – headed by Bank governor Sir Mervyn King – in wait-and-see mode, analysts believe.

Investec economist Philip Shaw said there was “less urgency” for the Bank to restart asset purchases. He said: “The 0.3 per cent quarterly increase in GDP in Q1, while arguably not making a material change to the outlook, has taken some of the pressure away from the committee to do something now.”

The vote could even see King and fellow policymakers David Miles and Paul Fisher reversing their calls for a further £25bn of QE. But many experts still believe persistent weakness in the economy, and the risk that Europe’s sovereign debt crisis could quickly snuff out a recovery, are likely to mean the Bank resumes QE – although possibly not until after the arrival of new governor Mark Carney in July.

National Australia Bank economist Tom Vosa said: “The majority of the committee would want to wait and see how the ­extension to the Funding for Lending Scheme will work through the system.

“We could get a further extension of QE following the arrival of Mark Carney in July, but this is now becoming increasingly data dependent.”

IHS Global Insight economist Howard Archer said: “We believe it is still more a question of when the Bank of England will pull the quantitative easing trigger again, rather than will they.

“The economy is still far from buoyant and with fiscal policy tight and global growth muted and stuttering, there is still a strong case for further support.”