Bank of England facing hard decision about more stimulus

LONDON - Agence France-Presse

A woman with a Union flag design umbrella walks past a summer clothing display in the window of a store on Oxford Street in London. Britain’s economy has fallen back into recession for the first time since 2009. AP photo

Bank of England policymakers meet this week to decide whether the eurozone’s worsening debt crisis means they will have to pump up Britain’s recession-hit economy with even more billions of new cash.
The bank’s rate-setting Monetary Policy Committee (MPC) will likely consider the option at its latest monthly meeting tomorrow, when it is also widely expected to keep its key lending rate at a record low 0.5 percent.

A string of recent weak data has raised questions about the health of the British economy, which faces headwinds from falling consumer spending, austerity cuts and the debt crisis in major trading partner the eurozone.

The eurozone’s dangerous sovereign debt crisis, which has snared Greece, Ireland and Portugal, is now circling Spain, sparking fresh fears of contagion across the 17-nation bloc and beyond. Britain is not a member of the eurozone.

Against this backdrop, many economists believe the MPC could re-start its Quantitative Easing (QE) policy, under which it has so far injected £325 billion ($525 billion) of new money into the economy.
Under QE, the bank creates new cash to purchase assets such as government and corporate bonds with the aim of boosting lending and economic activity.

Call for stimulus

“Economic data and surveys over the last month appear overall to have boosted the case for more QE while events in Greece and the eurozone have intensified the uncertainty and downside risks surrounding the growth outlook,” said Howard Archer, chief Europe economist at IHS Global Insight consultants.

“On balance, we lean towards the view that the Bank of England will hold fire on more QE at its June meeting but we certainly would not rule it out.

“We suspect that it will not take much bad news on the growth front for the MPC to pull the QE trigger again,” Archer added.

Policymakers voted unanimously in to leave policy on hold at their May meeting but one MPC member again called for more stimulus and the decision not to expand QE was described as finely balanced.
“The minutes of May’s meeting showed that the decision (on) ... Quantitative Easing was pretty close,” said Vicky Redwood, an analyst at Capital Economics research group.

“The news since then has strengthened the case for doing more. Our hunch is that the committee will take more action this month.

“But even if it continues to ‘wait and see,’ we expect QE to be resumed before long,” Redwood said.
Since the May meeting, the BoE has slashed its forecast for British growth and warned that the eurozone debt crisis is the biggest threat to recovery -- even if a credible solution is found.
The economy is now expected to grow by just under 1.0 percent this year, down from the BoE’s previous forecast of just over 1 percent, it said last month.