Bank of England keeps QE on hold despite weakening economy

MPC ignores advice of IMF to print more money, while new services survey shows fall in confidence

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The Independent Online

The Bank of England refrained from more monetary stimulus to boost the economy yesterday, despite fears that the already beleaguered British economy could be about to be knocked sideways by chaos in the eurozone.

The Bank's Monetary Policy Committee (MPC) voted to keep its £325bn quantitative easing programme on hold after its two-day meeting, resisting calls, including from the International Monetary Fund (IMF), for the central bank to do more to support economic activity.

The move was met with surprise by some City analysts since several key, economic indicators have pointed downwards since the MPC's May meeting, when the nine-member committee also voted to keep its stimulus on pause.

"With the economy showing no sign of recovery and the Monetary Policy Committee's central forecast predicting inflation will trend back to target within two years, it is a bit surprising that the MPC has chosen to sit on its hands again," Andrew Smith, the chief economist at KPMG, said.

"The big picture is that output has been essentially flat for the past 18 months and there is no reason to expect any significant change in the short term," he added.

A snapshot of the manufacturing sector last week pointed to the biggest monthly fall in activity in May since the collapse of Lehman Brothers in 2008.

However, a survey of the UK's services sector, which makes up 75 per cent of the economy, yesterday showed a healthier picture. The Markit/Cips purchasing managers' index remained steady at 53.3 in May, with any figure above 50 indicating growth.

Yet there were also signs of the eurozone crisis beginning to hit home, with the index of business confidence among services purchasing managers falling to its lowest level of the year.

Unveiling the Bank's Inflation Report last month, the Governor, Sir Mervyn King, said inflation was now likely to remain above the 2 per cent target for the remainder of the year. And some members of the MPC have expressed concerns prices might not come down as quickly as previously hoped – something that is likely to have weighed against more money printing.

The way MPC members voted will not be known until the minutes of the meeting are released in a fortnight. In May's meeting, only external member David Miles voted for more stimulus of £25bn, but the minutes also said several members saw the decision as "finely balanced" and that "further monetary stimulus could be added if the outlook warranted it".

The IMF last month urged the Bank of England to print more money in its annual report on the state of the UK economy. The Office for National Statistics estimates that the economy shrank by 0.3 per cent in the first quarter of 2012, after falling by 0.3 per cent in the final three months of 2011.

The IMF also said the MPC should look to buy up corporate bonds to increase the flow of credit through the economy. Sir Mervyn has so far rejected such a course of action.

The Bank also kept its policy interest rate on hold at the record low of 0.5 per cent.