Services sector holds the key to Bank's decision on more QE
Monday 05 November 2012
Bank of England rate-setters will pore over the health of the UK's dominant services sector today as they face a critical decision over whether to pump billions more into the nation's struggling recovery.
The Chartered Institute of Purchasing & Supply's latest activity index – where a score over 50 signals growth – is set to slow marginally from 52.2 to 52 in October, signalling a slower pace of expansion for a sector that accounts for more than three-quarters of the economy. Manufacturers saw a deepening decline last month although the construction sector grew modestly.
Investec economist Victoria Clarke said the MPC would face a "difficult decision" but added that she expected the Bank to hold off from sanctioning another round of quantitative easing. She said: "A reading in the 52 range may well help provide the committee with the confidence it needs to hold off sanctioning further asset purchases at that meeting."
The likely no-change decision comes amid growing doubts among MPC members such as Deputy Governor Paul Tucker over its effectiveness. It is also holding on for more evidence over the impact of its £80bn Funding for Lending scheme. A poll found that City economists expect no change in policy on Thursday by a majority of two to one, with interest rates also held at their 0.5 per cent record low. The European Central Bank is set to leave interest rates unchanged at 0.75 per cent.
The surprise 1 per cent growth for the UK economy in the third quarter – albeit boosted by one-offs such as a Jubilee bounce-back – may also stay the committee's hand amid tentative signs of revival in consumer and mortgage lending during September. The FLS, which allows access to cheap funds in return for growing lending to the economy, now has 30 banks and building societies signed up.
But the economy still needs growth of some 0.2 per cent in the final quarter to avoid shrinking over 2012 as a whole. Experts warn the nation also faces an Olympic headwind in the October-December period as the extra 0.2 per cent added to the economy by the Games drops out of the figures for the final quarter.
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