Slowdown puts pressure on Bank to print money

Steadily worsening prospects for the economy are intensifying the pressure on the Bank of England to resume its policy of quantitative easing, colloquially termed printing money, which injected some £200bn directly into the economy last year.

The Chartered Institute for Purchasing and Supply reported weaker business confidence last month, with the headline reading down to a 10-month low of 53.4. While a result above 50 still indicates expansion in the months ahead, the pace is slowing and, most ominously, much of the decline can be attributed to a fall in export orders, which had been the great hope of policy makers as they sought to rebalance and boost the economy.

The Bank's Monetary Policy Committee meets next week to decide its next move. With one of is external members, Adam Posen, issuing a powerful call this week for a new bout of quantitative easing, so-called "QE2", and another member, Andrew Sentance a long-time opponent of further loosening for fear of resurgent inflation, a three-way split seems likely, though rates are near certain to stay at 0.5 per cent and QE to be left on hold for now.

The softer manufacturing purchasing managers' survey for September adds to deteriorating signals in this week's official data on activity in the services sector for July, which showed a decline of 0.2 per cent. The property market is also showing clear signs of weakness, and consumer confidence has been edging lower since the emergency Budget in June.

This month's review of public spending and the allocation of cuts of £84bn over four years may also further erode business and household confidence, and with them investment and spending. As governments across Europe embark on austerity programmes there seems little further scope for UK exports to pick up the slack that seems certain to develop in the domestic economy. Hence the pressure on the Bank of England to alter its policy.

However, the MPC will want to wait for the official first estimate of growth over the third quarter, which is due on 26 October. The Bank also favours departures in policy to coincide with the publication of its quarterly Inflation Report, next due in November. The Chancellor, George Osborne, has indicated that, if the economy did stumble, he would expect the Bank to take action, rather than the Treasury reversing some of the planned spending cuts.

The evidence suggests that later this year the economy will still grow, but at a much slower rate than in the second quarter, which saw a remarkable bounce of 1.2 per cent. If the economy does slow, and the headlines surrounding the spending statement are downbeat, then these developments in themselves may generate a further downward twist to the economy.

Some are calling for the bank to move rapidly. David Kern, the chief economist at the British Chambers of Commerce, said: "Once the tough deficit-cutting measures start to bite, demand will be dampened and the cash flow positions of businesses will inevitably be hit. In view of the dangerous background, keeping interest rates at very low levels for an extended period is vital, but not sufficient.

"We urge the MPC to seriously consider increasing the quantitative easing programme to £250bn before the end of 2010, so as to enhance the economy's ability to cope with the big challenges ahead."