Central bank holds back on launching further QE

The Bank of England resisted pumping more cash into the struggling UK economy today despite mixed signs on the health of the recovery and rising tensions in the eurozone.

The most recent £50 billion injection into the Bank’s quantitative easing (QE) programme took place in February but members of the monetary policy committee (MPC) have vetoed increasing the stock of asset purchases from £325 billion.

Interest rates were held at their record low of 0.5 per cent but economists said the nine-strong committee would have “seriously considered” additional QE.

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The decision comes as the pressure mounts on political leaders to draw up a firm action plan to tackle the mounting eurozone crisis, with Spain appearing to move closer to taking an EU bailout and a crucial election in Greece imminent.

But hopes for the recovery were boosted earlier today when a closely-watched survey of the powerhouse services sector in May revealed robust growth, allaying some concerns over a worse-than-expected report on the smaller manufacturing sector last Friday.

Pressure on the Bank to implement more stimulus measures has been mounting in recent weeks after official figures showed the UK’s double-dip recession was deeper than previously thought, with a 0.3 per cent fall in the first quarter of 2012.

IMF boss Christine Lagarde also called on the Bank to lower interest rates further to help the UK weather the eurozone debt crisis.

And inflation continued to fall in April, providing more leeway for a fresh money injection.

While the Bank’s decision echoed that of the European Central Bank yesterday, China’s central bank moved to shore up its powerhouse economy by slashing its benchmark interest rate for the first time since 2008, dropping the one-year deposit rate to 3.25 per cent from 3.5 per cent.

Philip Shaw, chief economist at Investec, said he still expects an additional £50 billion QE boost in August – but action could be taken as soon as next month.

He said: “We consider that it would be wrong to rule out more QE. The crisis in the euro area poses a number of very obvious downside risks to the British economy.

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“Meanwhile UK growth looks set to remain below trend, at best, in any case over the next year.”

Anna Leach, the CBI’s head of economic analysis, said the MPC’s decision would have been a “tricky one”.

She said: “It seems that a ‘wait and see’ position has been adopted for the moment. The ongoing crisis in the euro area will continue to put pressure on fragile business conditions for the foreseeable future.

“But we still expect the UK economy to improve modestly later in the year, with further falls in inflation providing some support to family incomes.”