UK still in danger of recession, says Bank of England


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The Independent Online

The UK is still in danger of falling into recession, according to the Bank of England, but further emergency support is looking less likely amid concerns over inflation.

A sharp fall in construction output and a loss of activity around the forthcoming jubilee bank holiday could trigger further falls in gross domestic product (GDP), the Monetary Policy Committee (MPC) warned, following a 0.3% drop at the end of last year.

Despite the spectre of a technical recession, the MPC was encouraged by a wide range of survey indicators and data for the powerhouse services sector, which point towards underlying growth in the first half of the year.

The rate of inflation is also likely to fall more slowly than previously expected as rising oil and gas prices, as well as duty increases in the Chancellor's Budget, hike up the cost of living, the MPC said in minutes from its April meeting.

The nine-strong committee voted unanimously in favour of holding interest rates at a record low of 0.5% while only one member, David Miles, voted in favour of increasing the Bank's quantitative easing programme from its level of £325 billion.

Vicky Redwood, chief UK economist at Capital Economics, said additional emergency support in May was less likely but has not ruled out a further QE boost later in the year.

She said: "The committee now sees a greater chance of inflation persisting in the medium-term. And although the MPC highlighted the risk that the economy might contract again in the first or second quarter, it seems to put more weight on the more upbeat survey data."

In a further sign that QE is less likely in the short term, MPC member Adam Posen did not vote for an increase to the asset purchase programme.

Mr Posen has been an advocate of boosting QE for many months, voting in favour of a cash injection long before the MPC decided to switch on the printing presses again in October last year.

The meeting was also held before March inflation figures were published, which revealed an unexpected increase in the consumer prices index (CPI) to 3.5%, moving away from the Bank's 2% target.

The April minutes said: "To the upside, the risk was that elevated inflation might be more persistent than the committee expected and that the committee's commitment to achieving the target might be called into question."

However, the MPC said the possibility of further contractions in GDP in the first and second quarters of the year might "further damage household and business confidence".

The pound, buoyed by the weakening prospect of further QE, shot up against most major currencies after the minutes were published.

Sterling, which surged earlier in the week against the euro amid concerns over Spain's creaking finances, hit fresh 19-month highs today against the single currency.

David Kern, chief economist at the British Chambers of Commerce (BCC), said an increase in QE was not necessary.

He said: "The MPC's main priority should be ensuring that the large amount of assets already purchased is put to better use. The recent increase in QE should be used to help increase the flow of lending to businesses."