The Bank of England is expected to pump billions more pounds into the economy today and maintain record-low interest rates in a bid to boost the faltering recovery, analysts said.
Recent data revealed the economy contracted by more than expected
The central bank’s Monetary Policy Committee (MPC) is forecast to lift its economic stimulus from the current level of £275 billion (€332 billion) at its two-day meeting which started yesterday.
The BoE’s main interest rate has stood at 0.50 per cent since March 2009, when it also began injecting £200 billion into the economy under the policy known as quantitative easing (QE).
The bank opted last October to increase the amount by £75 billion but this was due to be completed by early February.
Under QE, the central bank creates new cash that is used to purchase assets such as government and corporate bonds in the hope of giving a boost to lending and economic activity.
“In the face of the anaemic recovery, and falling inflation, the MPC is likely to opt for further stimulus on Thursday,” said Colin Ellis, chief economist at the British Private Equity and Venture Capital Association.
“I expect another £50 billion of asset purchases, with more likely to follow later on this year as growth falls short of the committee’s expectations.”
Recent official data revealed that the economy contracted by more than expected in the fourth quarter, placing it dangerously close to recession as the eurozone debt crisis and austerity measures hit output.
British gross domestic product (GDP) dipped 0.2 per cent in the three months to December, driven by weakness in the production and construction sectors.
The disappointing data marked a major slowdown from the 0.6-percent growth witnessed in the previous three months.
Meanwhile, annual inflation fell in December by the biggest amount in more than two years. The Consumer Prices Index (CPI) slowed to a rate of 4.2 per cent in December from 4.8 per cent in November.
The drop was equal to the decline in the annual rate between March and April 2009, when Britain was mired in recession. The economy clawed its way out of the downturn in the third quarter of that year.
“More quantitative easing by the Bank of England is still odds-on for Thursday,” added IHS Global Insight economist Howard Archer.
“With GDP contracting and the economy currently still facing a highly challenging environment, there are compelling reasons for the Bank of England to administer further stimulus for the economy.”
The fourth quarter marked the first contraction since late 2010 and stoked concern of another recession – which is defined as two successive quarters of contraction.
“More QE is likely this week – but how much?” said Capital Economics analyst Vicky Redwood.
“The obvious option would just be to continue the recent rate of asset purchases.
“The bank has been buying about £5 billion per week – equating to a rate of £65 billion per quarter. So, another £50 billion or £75 billion looks likely.”
The BoE’s main task is to keep annual inflation close to a government-set target of two per cent.