Bank of England under pressure to help struggling economy

Bank’s monetary policy committee is expected to hold quantitative easing levels at £375bn after last month’s £50bn injection

Bank of England policymakers are facing mounting pressure to turn to further emergency measures to boost the recovery as the economic outlook becomes increasingly bleak.

The Bank’s monetary policy committee (MPC) is expected to hold quantitative easing levels at £375bn after last month’s £50bn injection while interest rates will be kept at record lows of 0.5%.

But economic growth figures released since the nine-strong panel’s July meeting revealed a sharper-than-expected decline in output between April and June.

The outlook darkened as a key purchasing managers’ survey revealed the worst manufacturing performance in three years in July and initial reports suggested the retail sector was not receiving the Olympic Games boost to business previously expected.

The focus will also be on the eurozone, where the European Central Bank (ECB) will reveal its own policy decision for the month after its boss recently pledged to do whatever it takes to save the single currency.

The comments from ECB president Mario Draghi prompted speculation that the central bank might return to financial markets and resume buying bonds of under-pressure countries, while a further cut to the key interest rate is also a possibility.

The MPC, chaired by Bank governor Sir Mervyn King, last month considered cutting rates below current levels in a drastic move that once seemed improbable.

However, most economists believe that while the action will be discussed again this week, the MPC will continue to favour quantitative easing as its economic weapon of choice.

Alan Clarke, UK and eurozone economist at Scotiabank, said: “The poor second quarter GDP data make it hard for the Bank of England not to loosen monetary policy further.”

He added: “However, we judge that a further reduction in bank rate could backfire and hold back the creation of new mortgages. Hence we suspect that the further policy ease will be in the form of more QE, not a cut in bank rate.”

The economy shrank by 0.7% in the second quarter, meaning the UK is now mired in the longest double-dip recession since quarterly records began in 1955 – and possibly since the second worldwar.

A reduced rate would be the lowest in the Bank’s 318-year history, with a cut to 0.25% saving a borrower with an average lifetime tracker rate on a £200,000 mortgage £328.56 a year, according to comparison site Moneyfacts.

But lower borrowing costs would deliver yet another blow to Britain’s savers, who have lost out since rates hit their current historic low in March 2009.

The Bank’s main concern over a rate cut beyond 0.5% is the impact it could have on some banks’ and building societies’ ability to lend.

Lenders have assets, mainly mortgages, with interest payments contractually linked to the Bank’s rate and a reduction below 0.5% might squeeze some lenders’ interest margins to the point at which they become less able to offer new loans to customers.

In its July meeting, the Bank raised the notion that the new £80bn “funding for lending” scheme aimed at kickstarting bank lending could lessen fears about the impact of a rate cut on the margins of lenders.

Clarke, economist at Scotiabank, said he expects another increase to the bank’s quantitative easing programme with the poor manufacturing survey reinforcing this view.

He said: “Most forecasters have assumed that the August MPC meeting is a non-event.

“The market has underestimated the probability of an expansion in QE at this week’s meeting.

“While we accept it is a close call, we believe that the extent of the revisions to the Bank’s projections mean that the Bank will not wait until November to expand QE further – rather it will act at this meeting.” © 2012 Guardian News and Media Limited or its affiliated companies. All rights reserved. | Use of this content is subject to our Terms & Conditions | More Feeds

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