Bank holds its hand on printing more money

Economists said the UK central bank may be forced into extending its programme of quantitative easing (QE) if the economy at home or in the single currency area deteriorated further.

The prediction came after the bank’s nine-strong monetary policy committee (MPC) kept interest rates at their record low of 0.5 per cent and maintained the QE programme at £275 billion following October’s surprise increase.

Those odds of a further injection of liquidity before the year-end narrowed as the EU drastically cut its growth forecast for the eurozone in 2012 to just 0.5 per cent from previous guidance of 1.8 per cent. It also slashed its growth forecast for the UK this year to 0.7 per cent from 1.1 per cent but said there were better prospects for exports.

Alan Clarke, economist at Scotia Capital, said yesterday’s decision from the bank came as no surprise but argued that its bond-buying programme may have to be raised soon to ward off a recession.

“The MPC will have had the inflation projection which will show it below target in two years – probably at 1.75 per cent,” noted Clarke.

“There may have been one dissenting voice for more QE but they have the programme in the pipeline and it is steady as she goes for now. If the eurozone goes pop the BoE may well expand its programme sooner.”

Chris Williamson at financial research group Markit said an escalation of the eurozone debt crisis raised the risk of a steeper, double-dip recession closer to home.

He added: “A swift resolution to the euro area’s debt crisis would mean this risk is low, but any signs of the situation worsening could therefore prompt the BoE to step in and add support to the UK economy via more QE – possibly as soon as the December meeting.”

Howard Archer, chief UK and European economist at IHS Global Insight, said he expects the bank to pump a further £50bn into the economy in the first quarter of 2012.

He said: “We expect the economy to be stagnant over the fourth quarter of 2011 and the first quarter of 2012 before returning to gradual growth, but it is very possible that contraction will occur, especially if there is no easing in the eurozone’s sovereign debt problems.”

The Bank of England is due to publish its quarterly inflation report next week.

The sharp cut in the EU’s growth forecast comes as the eurozone’s debt crisis has spread alarmingly to Italy. The interest rate on the country’s ten-year bonds has reached the same 7 per cent level that eventually forced Greece, Ireland and Portugal to request massive bailouts.

European commissioner for economic affairs Olli Rehn warned: “This forecast is in fact the last wake-up call. Growth has stalled in Europe, and there is a risk of a new recession.”

The report also contained revised figures for some individual member states.