Despite the gloom, Bank holds back on fresh cash injection

Bank of England policymakers yesterday stopped short of announcing further stimulus for Britain’s flagging economy despite fresh signs of a slowdown in the manufacturing sector.

The decision to hold the central bank’s quantitative easing (QE) programme at £275 billion and freeze interest rates at 0.5 per cent had been widely anticipated.

It came in spite of a call from the British Chambers of Commerce for an immediate £50bn extension to QE amid signs that both the service and manufacturing sectors have stalled.

Fears of a slide back into recession were compounded yesterday as the Office for National Statistics reported a surprise fall in UK industrial output during November.

Economists said that increased the likelihood that the overall economy had contracted in the fourth quarter of 2011 and made further QE a near certainty next month.

A key report released today will add to the gloomy outlook, with accountancy firm BDO warning the economy is “teetering on the brink”.

Its latest business trends report shows output dropping for the seventh consecutive month, although companies surveyed also point to easing inflationary pressures.

Neil Craig, office managing partner for BDO in Glasgow, said there were some areas for “cautious optimism” in the year ahead but warned the economy had reached a “crunch point”.

“The UK government must respond decisively if the UK is to avoid a period of prolonged contraction,” he said.

“To arrest the forecasted slump, we urge the Bank of England to consider a further round of quantitative easing and we encourage the banks to continue to step up their lending to UK businesses.”

The central bank’s current round of asset purchases will be concluded by February and by then its nine-strong monetary policy committee (MPC) will have access to new gross domestic product (GDP) and inflation estimates.

Ian McCafferty, chief economic adviser at the CBI, said: “The decision by the MPC to leave monetary policy unchanged was expected, since the current round of asset purchases is not yet complete.

“But, with economic conditions fragile and inflation expected to undershoot, the MPC appears to be signalling that a further extension of the asset purchase programme is likely in the months ahead.”

David Tinsley, UK economist at BNP Paribas, added: “We still expect more QE to be announced come February, with an extra £75bn on the cards.”

Interest rates have been at their historic low of 0.5 per cent for almost three years. The decision to keep them on hold will be welcomed by borrowers, but the extended period of lower lending costs has led to misery for savers.

l The European Central Bank left interest rates on hold, pausing to assess the affect of back-to-back cuts.