Monetary stimulus was held steady by the Bank of England yesterday, despite multiplying indications of a weakening UK economy. The Bank's Monetary Policy Committee (MPC) announced that its interest rate would remain at a record low of 0.5 per cent and that the £275bn quantitative easing (QE) programme would not be extended. David Kern, the chief economist at the British Chambers of Commerce, called the decision not to increase QE "disappointing" and urged the Bank to make "every effort to underpin business confidence and avoid a setback".
Many economists expect the QE programme to be increased next year when the present round of government bond buying comes to an end. Howard Archer, an analyst at IHS Global Insight, suggested that the MPC's decision not to extend QE might have been motivated by concerns among policymakers about potential damage to the Bank's credibility if inflation does not fall back as rapidly next year as they have forecast. "Holding back on more QE until early 2012 gives the MPC more time to judge whether inflationary pressures are easing, which some committee members believe is important for the Bank of England's credibility before it goes further down the QE road," he said.
Consumer price inflation is running at more than 5 per cent at the moment, well above the Bank's official target of 2 per cent. The MPC expects inflation to fall quickly next year as energy prices stabilise and the economy weakens.
In October, the MPC took markets by surprise when it increased its £200bn QE programme by £75bn over five months, saying that the move was justified by a stark deterioration in the economic outlook over the summer. But since October, the economic outlook has continued to worsen, with surveys of purchasing managers pointing to weaker growth, or even contraction. On Wednesday, the National Institute of Economic and Social Research estimated that growth slipped from 0.4 per cent to 0.3 per cent over the past three months and a report from the Office for National Statistics showed a 0.7 per cent contraction in manufacturing output in November.
The Organisation for Economic Co-operation and Development has forecast that Britain is entering a mild recession. And last week, the Office for Budget Responsibility said that its forecast that the economy would grow by 0.7 per cent in 2012 was dependent on eurozone leaders successfully "struggling through" the present continental sovereign and banking debt crisis.
George Osborne warned the House of Lords' Economic Affairs Committee yesterday that a collapse of the single currency would do "enormous damage" to the economy. "Those who say we would have a year or two of hardship, then bounce back out of it, are maybe somewhat optimistic," he said.
The Chancellor also cautioned that the Treasury's contingency planning for a eurozone breakdown could not fully insulate the UK from the impact. "I would give fair warning that however much contingency planning you do, a disorderly collapse of the euro would do huge damage to the UK", he said. "It doesn't matter how many plans you have to deal with that, you could make a bad situation less worse, but it would still be a bad situation."