Bank of England poised to decide on new stimulus as economy stutters

A DECISION on whether to inject further stimulus into the flagging UK economy appears on a knife-edge this week after growth in the powerhouse services sector slowed to a near two-year low while a post-Olympics retail rebound fizzled out.

Bank of England rate-setters had been expected to sit on their hands at the monetary policy committee’s (MPC) November meeting, which concludes on Thursday. It followed last month’s revelation that the UK economy had exited recession more strongly than anticipated in the third quarter.

However, analysts believe that a double whammy of negative economic news could provide a trigger for more quantitative easing (QE) or further monetary intervention.

The Markit/Cips purchasing managers’ index (PMI) for the services sector, which accounts for more than two-thirds of the economy, eased to 50.6 in October from 52.2 the previous month.

While holding just above the 50 mark that divides contraction from expansion, the reading was the lowest since December 2010 and fell short of City forecasts.

Meanwhile, the British Retail Consortium’s latest sales monitor – published today – points to the weakest performance on the high street in almost a year.

Retail sales values were down 0.1 per cent on a like-for-like basis from October 2011, while on a total basis, taking into account store openings and expansions, they were up by just 1.1 per cent. Excluding Easter, this was the lowest growth in total sales since November 2011.

Stephen Robertson, the BRC’s director general, said: “It looks like the modest sales revival we saw in September was something of a false dawn.”

Combined with a deeper contraction in manufacturing, the latest data raises the chances that the economy could shrink again between October and December after its 1 per cent rebound in the third quarter.

Rob Wood, an economist at Berenberg Bank who worked at the central bank until recently, warned: “A return to contraction for the UK is on the cards in Q4.”

But he said the Bank of England was still unlikely to launch a new round of QE this week, as the MPC had flagged a weak fourth quarter anyway.

“I think they will either do more asset purchases or an alternative stimulus, along the lines of the Funding for Lending Scheme, sometime next year,” noted Wood.

Howard Archer, chief UK economist at IHS Global Insight, the forecasting group, said: “The [services] survey certainly keeps open the possibility that the Bank of England could go for more QE.

“While we just about still lean towards the view that the Bank will hold off, it is looking an extremely tight call.

“One compromise could be for the MPC to go for £25 billion more QE rather than the recent £50bn dosage.”