Bank of England considering more quantitative easing

Bank of England policymakers will consider more drastic action to kick-start the UK economy today amid signs the fragile recovery is faltering.

Bank of England considering more quantitative easing

Bank of England policymakers will consider more drastic action to kick-start the UK economy today amid signs the fragile recovery is faltering.

Speculation has been growing that the Monetary Policy Committee (MPC) could be on the verge of extending its £200bn (€226.66bn) quantitative easing (QE) programme - effectively printing more cash.

With interest rates locked at a record low of 0.5%, the move is the only significant weapon remaining in the Bank's armoury.

However, it would be a high-risk strategy because the boost could fuel inflation, which is already well above target at 4.4%, and put more pressure on household budgets.

Business leaders and economists say there are strong arguments in favour of upping the QE stock, but believe action is unlikely until later in the year.

The debate around the MPC's monthly meeting has intensified after George Osborne signalled that a slew of poor data meant growth forecasts were set to be downgraded in his autumn statement on November 29.

However, the Chancellor insisted that the Government would stick to its deficit reduction plan, which he described as "the rock of stability upon which any sustainable recovery depends".

New figures from the National Institute of Economic and Social Research have added to the gloom, estimating GDP growth for the three months to August at just 0.2%, compared with 0.6% in the previous quarter.

Meanwhile, the Independent Commission on Banking is expected to recommend that "ring fencing" of banks' retail arms should be delayed for fear of hitting lending to business.

According to the BBC, the commission will say next week that the Government should put legislation in place for the separation from investment banking arms almost immediately - but implementation should then be phased in over a period of years.

The British Chambers of Commerce (BCC), which recently downgraded the UK's growth prospects, said the MPC needed to boost business confidence.

BCC chief economist David Kern said: "The MPC must keep interest rates as low as possible for as long as possible, and will have to start thinking about an early injection of additional QE."

He added: "But we would not be surprised if the MPC decides to delay such a move until later in the year because of concerns around inflation and a reluctance to alter policy too abruptly."

Soft manufacturing growth, a contraction in the powerhouse services sector and increased global uncertainty - reflected in recent stock market turmoil - suggest the UK economy could be heading towards a double-dip recession.

MPC member Adam Posen has voted in favour of so-called QE2 for several months and will be looking for more support after last month's meeting indicated a softening stance.

The committee voted unanimously in favour of holding interest rates at a record low of 0.5% in July after two members dropped calls for higher borrowing costs.

While Mr Posen was alone in voting for the stock of QE to be increased by £50bn (€56.67bn) to £200bn (€226.66bn) at August's meeting, minutes showed other members were considering the option.

Luiz Guidi, an economist at the CEBR think-tank, said the raft of weak data around the UK economy would increase pressure on the bank.

He said: "With falling industrial production adding to the bad news surrounding the UK economy and many signs of trouble in the US and the eurozone, the Bank of England's meetings during the autumn will be very interesting. Further quantitative easing this year looks increasingly likely."

Holding interest rates will be welcomed by borrowers, with the price of a fixed rate mortgage now at an all-time low as lenders factor in a longer spell with the Bank's base rate at rock-bottom.

However, the extended period of lower lending costs spells more misery for pensioners and savers, who will continue to suffer low returns on their money at a time when high inflation is eroding the value of their deposits.

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