Bank of England votes against increase in QE

The Bank of England declined to increase its programme of quantitative easing yesterday, despite further forecasts of a rapidly weakening UK economy and warnings that the eurozone debt crisis could result in a new credit crunch in Britain.

The decision of the Bank's Monetary Policy Committee to keep its £275bn programme of asset purchases on hold coincided with a downbeat growth forecast for the UK economy in 2011 from the European Commission. The Commission now expects the British economy to grow by just 0.7 per cent over this year and also warned that the economy may contract in the coming months.

The report from the Brussels executive said that its previous assumption that weak growth last year was a "blip" now looks mistaken: "The slowdown which began at the end of 2010 now looks more like a prolonged soft patch than a simple weather-related blip." It added that: "Risks from the euro area sovereign debt markets and the banking sector heighten this uncertainty. As such, a contraction in GDP in at least one of the next few quarters cannot be ruled out."

There was mixed news yesterday from the UK property market. The Council of Mortgage Lenders (CML) said that although the number of repossessions increased by 100 over the third quarter of 2011, it now expects total repossessions this year to be lower than its initial forecast of 40,000. The CML attributed this to the fact that borrowers have been benefiting from low interest rates.

The MPC agreed to keep its main policy rate at 0.5 per cent yesterday. But mortgage brokers warned that interest rates charged to mortgage borrowers could soon rise as banks find their own funding costs increase due to the eurozone sovereign debt crisis and pass on these costs to customers.

A group of lenders, including Woolwich, Halifax and Santander, have already increased their mortgage interest rates following rises in the London Interbank Offered Rate (Libor) since the summer. And David Hollingworth, of the mortgage brokers London and County, said there could be more to come. He said: "It is a diluted version of what happened after the Lehman crisis. We could be seeing a significant reversal in rates. Over the summer, mortgage lenders were competing harder with each other. Now that is changing".

An increase in mortgage interest rates could result in an increase in the number of repossessions as borrowers would find it harder to meet their higher monthly repayments. Since August three-month sterling Libor has risen from 0.3 per cent to 1 per cent, as banks have grown increasingly wary of lending to each other, even for very short periods. The Bank of England's main policy rate has been at 0.5 per cent since March 2009. And last month the MPC voted unanimously to purchase £75bn more in assets in order to boost the British economy.

Some analysts are calling for the Bank to search for more ways, beyond asset purchases, to loosen monetary policy. Nida Ali, economic adviser to the Ernst & Young Item Club, said: "There is no reason why 0.5 per cent should represent the lower bound for the official bank rate. The floor for the equivalent Fed funds rate in the US is 0-0.25 per cent."

Other analysts said yesterday that the MPC is likely to announce further asset purchases next year. Howard Archer of IHS Global Insight said: "We expect the Bank of England to enact at least a further £50bn of quantitative easing in the first quarter of 2012 and a similar dosage is likely to occur in the second quarter taking the total up to £375bn."

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