Stimulus on knife edge as economy edges to growth

Monday's news was gloomy with construction in a deep hole. Picture: Getty
Monday's news was gloomy with construction in a deep hole. Picture: Getty
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Bank of England rate-setters are torn over whether to inject more cash into the economy after figures were released yesterday showing the dominant services sector continuing to improve.

The monetary policy committee (MPC) was expected to respond to weak construction and lending figures by buying a further £25 billion of bonds.

But the Markit/CIPS purchasing managers’ index (PMI) revealed the fastest rise in services activity in five months, indicating the economy may have grown for a second successive month and avoided a triple-dip recession.

The figures encouraged some analysts to believe the Bank will not need to increase asset purchases or take other stimulative action when the two-day meeting of the MPC ends tomorrow.

Gloomy construction figures on Monday showed the sector endured its worst month since October 2009 and last week’s manufacturing PMI for February revealed a shock drop in activity.

And figures from the Bank on Monday also showed the Funding for Lending scheme was not reaching small firms and that lending from the high street banks had fallen.

This has led some to expect more asset purchasing through the quantitative easing (QE) programme, taking the total to £400bn.

Sir Mervyn King, the Bank of England governor, and two of his colleagues on the MPC voted in favour of more QE at last month’s meeting of the committee.

Chris Williamson, chief economist at survey compiler Markit, favoured a no-change decision.

“Faster growth of the dominant services sector offset downturns in manufacturing and construction during February, meaning the economy is likely to have grown for a second successive month after the downturn late last year,” he said.

Upbeat figures from the British Retail Consortium yesterday also showed retail sales grew last month at their fastest rate for three years.

Vicky Redwood, chief UK economist at consultancy Capital Economics, said the figures for the services sector – which accounts for 77 per cent of the UK’s economic output – could well be the “decisive factor” that ensures the MPC opts not to re-start its asset purchase – or money-printing – programme tomorrow.

She added: “Had the survey fallen sharply, those on the MPC wanting to do more QE might have mustered a majority.

“But the rise in services activity probably tips the balance towards the MPC doing nothing – especially following the solid high street spending figures released by the BRC.”

But Howard Archer, of IHS Global Insight, said the decision looks to be balanced on a knife edge.

“There is a very real possibility that the MPC could go for more stimulative action to try and help the long-suffering economy,” he said. “We believe that there could well be two £25bn helpings of QE to come, with one in the second quarter and one in the third quarter.”

Michael Saunders, of Citi European Economics, agreed that the decision would be a close call. He said: “We continue to expect the MPC will announce an extra £25bn QE this week, but if it does not come this week it probably will come soon.”