The possibility of a further huge injection of money to underpin the economy will be discussed by policymakers at the Bank of England this week, pushing back until deep into next year the prospect of any rise in interest rates from their all-time low of 0.5 per cent.
A further £50 billion in "quantitative easing", colloquially termed "QE" or "printing money", could be announced by the Bank as early as this week, though many commentators think they will postpone a move until the picture becomes clearer still. The Bank has already pumped £200bn into the financial system. A second round – dubbed "QE2" – is now on the cards.
The Chancellor, George Osborne, will face MPs on the Treasury Select Committee on Tuesday. While the main focus will be on the accountability of the Bank, MPs may take the chance to ask Mr Osborne about the apparent serious slowdown in economic activity.
Politically, QE2 would be highly charged, as it would make more explicit the policy, hinted at by the Bank and the Chancellor: that the Bank will support the economy while the Treasury goes about cutting public spending, jobs and the budget deficit. In such circumstances monetary easing would push demand and, in the view of many at the Bank, ensure that inflation does not fall far below the 2 per cent target next year.
The Shadow Chancellor, Ed Balls, has suggested that this has politicised the Bank. In any case, the "doves" at the Bank will also have their case strengthened by evidence of a dramatic softening in commodity prices in recent weeks.
The unexpected persistence of high inflation led many to believe it was certain that the Bank would have to raise rates before long. But the sheer feebleness of the recovery – now being confirmed in a raft of data – is forcing the Bank to reconsider. Public comments by members of the nine-strong Monetary Policy Committee, which will announce its decision at noon on Thursday, have hinted at an easing of policy.
Hitherto the Committee has split between two or three so-called "hawks" who wanted an immediate hike in rates, one "dove" who voted for a further £50bn injection of QE, and a large bloc, effectively led by the Governor Sir Mervyn King, who have voted for no change since last year.
The latest minutes of the MPC meeting last month show that other members are now contemplating QE2 in a way they were not before; the Governor himself, appearing before the Treasury Committee last week, said that he didn't envisage rates rising before unemployment starts to fall, a development many economist think will take more than a year to materialise.
InMay the Deputy Governor for Monetary Policy, Charlie Bean,said that "the crucial question is whether this just represents a temporary 'soft patch' of the sort often seen during the early stages of economic recoveries, or whether it is instead the harbinger of a prolonged period of slow growth".
Weak data from the manufacturing sector at the end of last week showed the industrial revival running out of steam; a crucial survey of sentiment in the services sector, comprising 70 per cent of the economy, is due tomorrow. A "prolonged period" of slow growth already seems to have arrived.
In terms of the voting on Thursday, it is possible that Sir Mervyn might persuade his colleagues Mr Bean and Paul Fisher, executive director for markets, into the easing camp; Mr Fisher has said another round of QE is "very much on the table". They would join the long-standing proponent of QE2, Adam Posen, and David Miles, another dove-ish external member who has stressed the fragility of consumer confidence, in forming a bare 5-4 majority in favour of QE2.