The Bank of England will pump at least £50bn into the economy this week, as rate-setters look to evade a double-dip recession.
The likely resumption of quantitative easing, in which the Bank buys government gilts from pension funds and insurers with newly minted electronic cash in a bid to lower borrowing costs, follows a 0.2 per cent contraction for the economy in the final three months of 2011.
The Bank's monetary policy committee (MPC) injected £75bn into the economy last October. City analysts believe Threadneedle Street will further prop up the recovery with an extra £50bn in QE. The biggest signs of strength have come from the UK's services sector, growing at its fastest pace for nine months, according to industry surveys.
Since QE started in March 2009, the Bank has bought £275bn in gilts, but this could swell to £400bn in 2012, according to a Lloyds Bank Corporate Markets analyst, David Page. He said: "Our central call is that the pace of improvement will slacken, and concerns about credit provision will see the MPC provide stimulus well beyond current levels."
The Bank reckons its original £200bn round of QE was the equivalent of slashing interest rates by 3 per cent and boosted growth by up to two percentage points. But it also added to inflation, and experts have questioned the effectiveness of the policy.
Colin Ellis, the British Private Equity & Venture Capital Association's chief economist, said: "Thus far, there is precious little sign that QE has made it cheaper or easier for households and small businesses to get credit."
Another risk facing the MPC is running out of things to buy, but a move into other assets such as corporate bonds is opposed by the Bank's governor, Sir Mervyn King, as tantamount to betting with public money – a job for politicians, not central bankers.