50 Billion More QE to Come From BOE This Week

July 1, 2012 at 20:26


The Bank of England is poised to pump 50 billion pounds of fresh stimulus into the ailing economy in a bid to drive Britain out of recession.

The Bank’s Monetary Policy Committee (MPC) is expected to vote for more bond purchases through quantitative easing (QE) when it makes its monthly decision on Thursday.

It would take the total spent under the programme to 375 billion pounds.

Additional stimulus would come against a backdrop of a recession in Britain that is deeper than initially thought, a eurozone debt crisis that continues, and falling inflation.

Michael Saunders, economist at Citigroup, said: “We expect the MPC will restart QE at the upcoming meeting, in reaction to the persistent weakness of the UK economy, easing inflation worries, and ongoing European Monetary Union crisis.”
The latest economic indicators suggest the economy may have contracted for a third successive quarter between April and June, having shrunk by 0.4 percent in the fourth quarter of 2011 and by 0.3 percent in the first quarter of this year.

Philip Shaw, economist at Investec, said: “Domestically, the official numbers cast some doubt as to whether the economy has begun to expand again, following two quarters of contraction. Meanwhile, signs of a slowdown elsewhere in the world have intensified.”

The case for more QE has also been strengthened by inflation, which fell to a 2 1/2-year low of 2.8 percent in May from 3 percent in April. Inflation has steadily fallen over recent months, after peaking at 5.2 percent in September last year.

Minutes of the June MPC meeting revealed growing support for more QE, with four out of the nine members voting in favour. While it was not enough to secure a majority, it represented a key shift and suggested the committee was moving closer to a collective view that the economy is in need of more stimulus. The Bank’s Governor, Sir Mervyn King, was among those voting for further asset purchases.

While the Government presses ahead with its austerity plan in order to reduce the deficit, there is little scope for a fiscal boost to the economy.

Monetary policy is already unprecedentedly “loose,” with interest rates at an all-time low of 0.5 percent since March 2009, and QE at 325 billion pounds.

The MPC has always said that it is ready to expand QE when necessary. Economists at Citigroup predict that QE will ultimately be expanded to a total of L500 billion. Christine Lagarde, head of the International Monetary Fund, said in May that the Bank should considering lowering interest rates as well as more QE to support the economy.

The British Chambers of Commerce believes more QE “may prove to be counterproductive” by stoking inflation.

David Kern, the BCC’s chief economist, said: “Adding to QE is not a risk-free policy, as it will limit the decline in inflation at a time when it is important for it to fall. This will be the most important single factor likely to underpin real incomes and boost demand in the UK econom