Interest rates on hold as pressure grows to pump more cash into economy

Economists see the vote over extending quantitative easing (QE) as a much closer call than in recent months amid growing evidence the UK economy is struggling to gain traction.

That QE programme stands at £325 billion and just a single member of the Bank’s nine-strong monetary policy committee (MPC) voted in favour of increasing it last month.

But, since then, official data has shown the UK economy sliding back into recession in the first quarter of the year, while a raft of surveys have pointed to either sluggish or no growth in key sectors, particularly retail.

Citi economist Michael Saunders said the MPC had been “leaning heavily” on upbeat purchasing managers’ index (PMI) reports in recent months to argue that the economy was recovering. “With the PMIs now falling back, the MPC probably will have to acknowledge that the economy is underperforming,” added Saunders. “We continue to believe that more QE is likely, either at the May meeting or later.”

Philip Shaw, at Investec, described the outcome of this week’s rate-setting meeting as “one of the most uncertain for some time”, but said a further £25bn of QE was “likely”.

He added: “That would leave the MPC in a good position to end the latest round of QE in August if things do improve, or to continue its programme should economic conditions deteriorate further.”

Many other economists do not expect a fresh cash boost this month and point to the inflation headache still facing policy-makers. Consumer price inflation remains well above the central bank’s 2 per cent target after it edged up to 3.5 per cent in March, ending its decline from a peak of 5.2 per cent hit in September.

Last week, influential think-tank the National Institute of Economic and Social Research said the UK economy would show “close to zero” growth this year before gathering pace steadily in 2013 and beyond.

Bank of England governor Sir Mervyn King, meanwhile, said in a speech at the BBC that the economy may recover slowly later this year after a weak start.

Last month’s rate-setting meeting saw MPC member Adam Posen – a long-time advocate of boosting QE – perform a U-turn and vote against an increase.

David Tinsley, UK economist at investment bank BNP Paribas, said the hurdle for an extension to QE “looks quite high”. He added: “It will need Adam Posen to change his mind back again, and the inflation outturns have been higher than the Bank was expecting in February. Without the luxury of more data the committee may be persuaded to pause QE, but it’s the sort of environment where policy errors can be made with ease.”

The outcome of the latest meeting is due at midday on Thursday.