Bank decides this week on QE policy extension

Mixed economic signals form the backdrop to Thursday's MPC meeting
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The Independent Online

The Bank of England will decide at a crucial meeting this week just how far to extend the quantitative easing programme designed to help ward off deflation.

The Bank's Monetary Policy Committee is not expected to make any change to the 0.5 per cent interest-rate level at its monthly meeting on Thursday, but its decision on quantitative easing will be keenly watched.

There were calls for the Governor, Mervyn King, to inject the final £25bn tranche of funds for quantitative easing signed off by the Chancellor, Alistair Darling, after Britain's gross domestic product contracted by 0.8 per cent in the second quarter, rather than the forecast 0.3 per cent. The Bank's decision comes against a backdrop of mixed signals from the economy. The quarterly trends survey from the Confederation of British Industry will confirm today that the rates of decline in both orders and output among smaller manufacturers are now slowing.

Although only 17 per cent of companies reported rising orders in the three months to July, the resulting balance of minus 34 per cent was a massive improvement on the previous quarter's minus 51 per cent – the worst since the survey began in 1988.

Similarly, although the volume of factory output continued to decline, with only 15 per cent of businesses seeing an increase over the three months, the balance of minus 28 per cent was a marked improvement on the previous quarter's minus 48 per cent. Russel Griggs, at the CBI, said that although business conditions remain difficult for small and medium-sized manufacturers, "things aren't quite as gloomy as they were three months ago".

There is a similarly ambivalent picture for the economy as a whole. Despite the grim GDP figures for the last quarter, the recession could be over in as little as three months, says the accountant BDO Stoy Hayward. Their index, which measures short-term turnover expectations and order-book strength, saw its biggest monthly leap in 13 years last month, and suggests a flat rate of GDP growth in the current quarter.

The number of companies going into administration may have plateaued, says Deloitte. Corporate bankruptcies shot up by 18 per cent in the first half of the year, but the rate declined by 21 per cent in the second quarter.