Economists split on Bank of England’s QE decision

Pressure for more quantitative easing has intensified amid the recent deepening of the eurozone crisis

Bank of England policymakers are set to reveal whether they plan to prop up the UK economy with more emergency support.

Members of the bank’s monetary policy committee (MPC) will announce on Wednesday whether they plan to increase their quantitative easing (QE) stock from £325bn – after injecting £50bn in February.

Economists said the decision of the nine-member committee was a close call and that more QE by August looked inevitable if they did not vote in favour this month. Interest rates will be kept at a record low of 0.5%.

Pressure for further stimulus measures has intensified amid the recent deepening in the eurozone crisis and after figures showed the UK in a technical recession, with gross domestic product declining 0.2% in the first three months of the year after a 0.3% drop in the final quarter of 2011.

However, minutes of the bank’s last meeting showed a reluctance to increase QE, with arch-dove Adam Posen dropping his call for an extra £25bn.

Inflation has been stubbornly high, rising unexpectedly in March to 3.5%, despite governor Sir Mervyn King and his colleagues predicting that the Consumer Price Index (CPI) would fall to the government’s 2% target by the end of the year.

The accuracy of official data has been called into question after a run of purchasing managers’ surveys in the first three months of the year revealed decent growth in the manufacturing, construction and services sectors.

Howard Archer, chief economist at IHS Global Insight, said: “We expect the MPC to hold off from more QE due to its current heightened inflation concerns and a belief that the economy is seeing underlying modest growth despite the reported first-quarter GDP contraction that put the economy officially back into recession.

“However, we expect the MPC to keep the door very much open to more QE should the economy fail to show underlying improvement over the coming months.”

Philip Shaw, chief economist at Investec, has forecast a £25bn QE round this week as the gloomy economic outlook dominates the committee’s decision-making.

He said: “It is entirely feasible that some MPC members are fretting about ‘sticky’ price pressures. However, the way in which events over the past month have panned out suggest that these considerations will be overtaken by the more subdued macro picture.”

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