Sharp drop in inflation is clearing the way for more QE

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The Independent Online

The Bank of England was given the green light yesterday to pump billions more into the UK's stalled recovery as soon as next month, after a shock fall in inflation during May.

Its Consumer Prices Index benchmark slipped from 3% to 2.8% last month, the lowest since November 2009 and well below forecasts of an unchanged rate, as sliding petrol and food costs eased the pressure on squeezed household budgets.

Rate-setters on the monetary policy committee held off from cranking up the printing presses again two weeks ago. But experts said the UK's double-dip recession and the lingering crisis in the eurozone could trigger more action at the Bank's July policy meeting.

The better news on inflation comes after Bank Governor Sir Mervyn King hinted in his Mansion House speech last week that further quantitative easing could sit alongside measures to support bank lending.

The first £5bn auction of cheap cash for the banking system takes place today while details of an £80bn "funding for lending" scheme will be released within weeks.

The Bank's QE programme, launched in March 2009, currently stands at £325bn, although ING Bank economist Rob Carnell said the MPC could eventually pump a further £125bn into the economy.

He said: "We expect eventually the Bank's asset purchase scheme to be expanded to £450bn... Weaker inflation, alongside a string of weak activity data recently, will help the Bank of England to make the case for further QE at their July 5 meeting."

Markets took their cue from the figures to sell off the pound yesterday. Sterling fell nearly a cent against the dollar to a low of $1.5622 soon after the figures were released. The latest fall in the inflation rate comes weeks after the Bank's forecasts suggested that CPI would be above its 2 per cent target until the middle of next year.

The cost of living is well below the MPC's central projection of 3.2 per cent for the second quarter with more relief on the way in the second half as energy prices fall back and the global economy wobbles.

RBS economist Ross Walker said: "May's data do serve to lower the hurdle to QE as soon as July, should the MPC wish to oblige."