Bank of England must be prepared to support the economy, BDO says

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The Independent Online

The Bank of England must stand ready to rescue Britain's economy from a double-dip recession, a leading accountant warned yesterday, amid growing concern the Government is not prepared to change course on fiscal policy if the recovery stumbles.

Peter Hemington, a partner at BDO, the country's fifth-largest accountancy firm, urged the Bank's Monetary Policy Committee (MPC) to put fears of inflation to one side and to consider a return to its policy of quantitative easing – in addition to continuing to leave interest rates on hold at 0.5 per cent, as the MPC did last week for the 27th consecutive month.

BDO's own research suggests that consumers' views of how prices will move in the coming months have hit a 32-month high, though Bank of England data on inflation expectations published on Friday was more sober.

However, Mr Hemington backed the Bank's view that inflation was likely to begin moderating once the influence of short-term factors eased – and he said consumers' expectations were likely to prove exaggerated.

In any case, there has so far been little sign of inflation expectations feeding through into higher wage demands, let alone pay settlements, the outcome that would really unnerve members of the MPC.

Official data suggests that pay increases across the public and private sector are currently running at an average of just 2.1 per cent – well below levels seen before the recession.

In fact, BDO said, current measures of inflation may overstate the underlying picture, with around a third of the headline consumer price index rate of 4.5 per cent accounted for by increases in indirect taxes. It also expects the recent slowing in economic growth rates of major economies – including China, the US and the eurozone – to ease commodity price rises, which have been responsible for much of the rise in inflation in recent months.

"We must not exaggerate the threat of inflation to the UK economy as wage inflation remains contained and commodity prices have started to come down," Mr Hemington warned.

"The economic recovery is set to remain unspectacular for the rest of 2011. Therefore, we believe that calls for a rise in interest rates are premature. As a fiscal 'Plan B' looks pretty unlikely, the Bank of England should not discount the possibility of a further injection of quantitative easing."

In calling for a possible return to quantitative easing, the monetary policy process through which the Bank has sought to stimulate the economy with £200bn, Mr Hemington has gone further than most economists in recent months, though his views echo those of at least one member of the MPC.

Assuming he did not change tack at the June MPC meeting, Adam Posen has voted in favour of a new round of quantitative easing worth £50bn in every meeting since last October.

Nevertheless, there has been no evidence of any appetite for such a policy among the other eight members of the MPC, several of whom have voted for the opposite course of action on monetary policy in recent months, a rise in interest rates.

Still, the disappointing growth posted by the UK economy in the first quarter of the year – just 0.5 per cent – and the apparent failure of the recovery to pick up during the second quarter have seen growing calls for a moderation in either fiscal or monetary policy.

Financial markets now do not expect to see an interest rate rise before the end of the year at the earliest.