Bank urged to pump £50bn into economy

One of the country’s leading business groups, the Institute of Directors (IoD), called on the central bank’s rate-setters to urgently pump a further £50 billion into the economy through quantitative easing (QE) as evidence mounts of another unsettling economic downturn.

Graeme Leach, chief economist at the IoD, which represents more than 40,000 business leaders, urged the Bank’s monetary policy committee (MPC) to act now before the UK tumbles into a second, damaging recession.

“The time to launch QE2 has arrived,” Leach said. “The downside economic risks are sufficiently great to warrant an extension in quantitative easing now, in order to avoid the risk of a double-dip recession.

“We already have an L-shaped economic recovery and the hit to business and consumer confidence over the summer risks a slip back into recession, which could have dire fiscal consequences. Expanding QE by £50bn initially is a sensible and limited response.”

The campaign for QE2 has heated up in the face of a raft of depressing data from both the manufacturing and key services sectors.

Yesterday official figures showed that industrial production took a surprise turn for the worse in July, falling by 0.2 per cent after zero growth the previous month.

The Office for National Statistics said the unexpected fall was down to unusually lengthy maintenance on North Sea oil rigs which in turn led to a 1.5 per cent drop in oil and gas production. The oil and gas figures offset a slight 0.1 per cent rise in manufacturing output.

Britain’s economic fragility was also underlined yesterday by a sharp downgrade in growth estimates by the National Institute of Economic and Social Research (NIESR),

The think-tank said GDP growth is likely to have slowed to 0.2 per cent in the three months to August, compared with 0.6 per cent expansion in the three months to July, reinforcing fears that the economy has contracted during the third quarter, which runs from the beginning of July to end of September.

NIESR also warned that the 0.2 per cent figure may have been “flattered” by a bounce-back in May following April’s sluggish performance as a result of the extra bank holiday for the royal wedding.

Earlier this week, even the most optimistic economists were forced to admit the storm clouds were gathering as the UK’s dominant services sector, which accounts for some three-quarters of GDP output, racked up its worst monthly performance in a decade.

Most economists believe it is unlikely that the MPC will push the button on QE2 at today’s rate-setting meeting, although the odds on an intervention before the end of the year are shortening.

IHS Global Insight economist Howard Archer said: “There is certainly a mounting case for stimulative action. However, we believe that further QE remains unlikely as soon as this Thursday given current elevated inflation levels and still significant upside inflation concerns.”