The Bank of England is deciding whether to pump billions more pounds into the ailing British economy.
Bank watchers are split on whether the nine policymakers would announce more stimulus yesterday, or wait another month.
There is growing pressure on the bank to resume quantitative easing whereby it essentially creates new money by buying financial assets from institutions even though inflation is running at 4.5 percent, more than double the bank’s target of 2 percent.
RELUCTANCE
With the debt crisis in Europe becoming more acute, signs of a reluctance among banks to lend to each others and consumers reluctant to spend, the Bank of England is debating a loosening in policy, just a few months after the consensus in the markets was that it would be looking at when to start raising interest rates from their super-low levels.
Jane Foley, an analyst at Rabobank International, expects the bank “to sit on its hands until November” when it will be armed with its latest quarterly projections that will include the forecast that inflation will drop sharply next year, providing rate-setters “with the necessary ammunition to loosen policy.”
Though inflation is higher than hoped amid sky-high energy costs and sales tax rises, the British economy is stalling as it gets buffeted by the problems in the euro area.
Figures released on Wednesday showed the British economy grew by only 0.1 percent in the second quarter, half the previous estimate. It managed little or no growth in the previous six months.
The bank spent £200 billion (US$310 billion) on quantitative easing between March 2009 and January, and it believes that helped pull the economy out of a deep recession triggered by the global banking crisis.
US economist Adam Posen has been alone among the nine Monetary Policy Committee members to vote for another £50 billion in asset purchases, but minutes of last month’s meeting signaled a shift in sentiment with “most members” agreeing that the case for more stimulus had strengthened.
With the base rate at an all-time low of 0.5 percent and the government cutting spending, quantitative easing is the one of the only remaining big levers left in the bank’s armory to jolt the economy to life.
Former chancellor of the exchequer Alistair Darling, who was in charge during the first round of quantitative easing, was skeptical about the impact of another round.
“On its own, another £50 billion of quantitative easing is not going to do the trick,” Darling said in a BBC radio interview.
‘LACK OF CONFIDENCE’
“Unless you do something to address the lack of confidence in the economy, which is really holding back businesses ... then my fear is we are going to have a long period of no growth whatsoever and that will mean that the day on which we can actually reduce our borrowing is going to be put off again and again,” he added.
Simon Hayes, an economist at Barclays Capital, said more stimulus would be most effective if the US and EU were also pursuing expansionary policies, as they were in 2009.
The European Central Bank was also scheduled to meet yesterday, and is also under pressure to loosen policy even though inflation is running ahead of target. However, because it has already raised borrowing costs twice this year, it has more room to reduce interest rates.
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