Bank of England set to add £50bn economy boost

 

The Bank of England is expected to unleash another multi-billion round
of emergency support for the UK economy tomorrow despite signs that the
UK's financial health may be starting to improve.

The Bank's Monetary Policy Committee (MPC) is forecast to increase its quantitative easing (QE) programme by £50 billion to £325 billion in a bid to stave off a recession, while it will also hold interest rates at record lows of 0.5 per cent.

Many economists had previously expected the MPC to inject an even greater sum into the economy but surprisingly upbeat industry surveys for January have forced some to revise down their estimates.

The closely watched Markit/CIPS surveys showed that the manufacturing sector returned to growth in January, while the powerhouse services sector saw a record leap in optimism.

Malcolm Barr, an analyst at JP Morgan, had previously forecast an injection of £75 billion but said the "much firmer than expected" data meant he now pencilled in a £50 billion boost instead.

Meanwhile, Alan Clarke, UK and eurozone economist at Scotiabank, said the survey data "seriously puts the cat amongst the pigeons" ahead of the Bank's decision.

But he added: "We have had our doubts for some time that the next QE instalment would be as big as £75 billion. Our view has been that £50 billion was a better bet."

Despite the upbeat data, most analysts also insisted it was still too early to call a recovery after respected thinktank NIESR recently warned that the UK economy would shrink by 0.1 per cent in 2012 amid weak investment and uncertain conditions.

Meanwhile, recent extreme weather has clouded the picture further, with some economists warning the heavy snowfall and icy conditions could hit economic output, as they did at the turn of the year in 2011.

Howard Archer, chief UK and European economist at IHS Global Insight, said: "The snow has come at a very brittle time for the UK economy, adding to the headwinds that it is already battling against as it tries to dodge recession.

"Obviously the longer that the snow and freezing conditions last, the more will be the disruption to economic activity, and the bigger the risk that the first quarter will see further contraction in GDP."

The economy contracted by 0.2 per cent in the final quarter of 2011, sparking fears that the UK would fall back into another recession - defined as two successive quarters of falls - albeit a much milder one than previously.

The Government and Bank have both placed much of the blame for the UK's economic difficulties on the troubles in the eurozone, which still have no clear resolution.

But the MPC has in recent months held fire on boosting QE as it waited for the asset purchases unveiled in October to be completed.

Business leaders - such as the British Chambers of Commerce - have called for further QE and are likely to back an increase on Thursday.

However, the decision will raise fears over the impact on pension funds as QE can fuel inflation, which would spell more gloom for savers who have already seen the value of their pots eroded by the high cost of living and low interest rates.

But the expected deterioration in the economic outlook means it is more likely that inflation - which fell to 4.2 per cent in December - will undershoot the 2 per cent target in the medium term.

PA

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