Bank of England hints at more monetary stimulus

MPC minutes suggest more easing possible as retail sales show biggest slowdown in two years
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The Independent Online

The Bank of England gave a strong indication yesterday that it is preparing to inject more money into the ailing British economy.

The minutes from this month's meeting of the Bank's rate-setting Monetary Policy Committee showed that eight members voted to keep the Bank's quantitative easing (QE) programme on hold, while just one, David Miles, backed more stimulus.

However, in a sign that the MPC as a whole is leaning to more action to support the economy, the minutes noted: "For several members, the decision not to expand the asset purchase programme at this meeting was finely balanced... further monetary stimulus could be added if the outlook warranted it." That was interpreted by City analysts as a sign that more stimulus could be on the way, possibly as early as June's MPC meeting.

"It won't take much to tip the committee into doing more QE," said Samuel Tombs of Capital Economics.

Some MPC members have voiced concerns that inflation might not fall back as quickly as they expected, but yesterday the Office for National Statistics said the consumer price index dropped in March to 3 per cent, giving the Bank more leeway for stimulus.

More evidence of the weak state of the British economy came today from official figures which showed that retail sales volumes in April fell by 2.3 per cent, its biggest monthly drop since January 2010.

IHS Global Insight's Howard Archer said spending levels naturally fell back after a sharp increase in March prompted by fuel hoarding, and that last month's exceptionally wet weather also deterred shoppers. But Mr Archer added that there was little reason to expect a sharp rebound soon.

"There is [a] very real worry that already low and brittle consumer confidence will have taken a significant hit from the news that the UK is back in recession, and this will lead to increased caution in spending," he said.

In its quarterly Inflation Report last week, the MPC cut its growth forecast for 2012 from 1 per cent to 0.8 per cent. It also said inflation would not fall below its official 2 per cent target this year, as previously forecast.

The International Monetary Fund yesterday urged the Bank of England to support the UK economy by pushing through more QE. It also called on the Bank to ease the flow of credit by buying up corporate bonds, something that has been fiercely resisted by the Bank's Governor, Sir Mervyn King.

A report by the Bank of England's agents released yesterday also showed a subdued picture. While the survey suggested some growth in consumer demand during May and a small increase in private sector capital spending, it also found a further contraction in construction output and a flat outlook for employment.

That chimed with the CBI's monthly industrial trends survey for April, which showed a fall in both export growth and domestic demand. The survey's total order book balance fell to minus 17 this month from minus 8 in April, its lowest reading sinceDecember. The export order bookbalance also dropped to minus 12 fromminus 10, the lowest since January.

Meanwhile, in a speech to the National Association of Pension Funds yesterday, the Bank of England deputy governor and MPC member Charlie Bean said that more QE might be needed if economic conditions in the UK "deteriorate significantly".