More stimulus on way for ailing UK
The bank's monetary policy committee will take its monthly vote on Thursday and while it is likely to leave interest rates on hold at 0.5 per cent, economists believe there is a strong possibility it will increase its quantitative easing program by £25 billion ($37 billion), taking it to a total of £400 billion.
The voting pattern at the committee's February meeting suggested it was moving closer to more monetary stimulus for Britain, with three members of the nine-strong committee backing a £25 billion increase in the bond-buying program.
Crucially, one of the three voting in favour of more easing was the bank's governor Sir Mervyn King.
In the past it has usually followed that fellow members of the committee vote in the same way at subsequent meetings.
Scotiabank economist Alan Clarke said an expansion of quantitative easing was "more likely than not" at the March meeting.
"The recent noises from MPC members suggest [they] want to do something, but it is not yet clear what," Mr Clarke said. "The default policy tool has tended to be more QE and a £25 billion expansion at this week's meeting seems to be the most likely outcome."
The case for stimulus appeared to strengthen last week when data showed the manufacturing sector shrank unexpectedly in February, after two months of growth. Meanwhile, data showed mortgage approvals fell slightly in January, and while there has been evidence the government's Funding for Lending Scheme is having some positive effect on overall lending, credit availability for smaller businesses is still poor. Mr Clarke said new figures to be published this week were likely to show that take-up of the scheme continues to be "muted".
Inflation remains above the 2 per cent target at 2.7 per cent, and the bank has forecast it is likely to remain above target for two years.
However, the MPC has signalled it is willing to look beyond the target and provide more stimulus should it be justified by a weak backdrop for growth.
Telegraph, London
Frequently Asked Questions about this Article…
The Bank of England's Monetary Policy Committee will vote on Thursday. Economists expect it will likely keep the official interest rate on hold at 0.5% but may expand its quantitative easing (QE) bond‑buying programme by £25 billion, taking total QE to about £400 billion to pump more money into Britain's stagnant economy.
Quantitative easing is the Bank's bond‑buying programme used to inject money into the economy. The article says QE expansion is being considered because UK growth looks weak (for example, manufacturing unexpectedly shrank in February) and policymakers may use more QE to stimulate activity despite inflation being above target.
Although inflation is reported at 2.7%—above the 2% target—the MPC has signalled it is willing to look beyond the target if a weak growth backdrop justifies further stimulus. The Bank has also forecast inflation may remain above target for up to two years, so growth concerns (like a contracting manufacturing sector and weak small‑business credit) are influencing policy discussions.
At the February meeting three of the nine MPC members backed a £25 billion QE increase, and one of those was Governor Sir Mervyn King. Historically the Committee's voting pattern can signal future moves, and economists such as Scotiabank's Alan Clarke say a £25 billion expansion at the March meeting is 'more likely than not.'
Keeping the official interest rate at 0.5% would generally maintain lower borrowing costs. The article notes mortgage approvals fell slightly in January, suggesting demand or lending conditions remain soft even with low rates, and that credit availability for smaller businesses is still poor.
The article reports that the Funding for Lending Scheme appears to be having some positive effect on overall lending, but take‑up of the scheme remains 'muted' and credit availability for smaller businesses is still poor, so benefits to smaller firms have been limited so far.
Recent data show the manufacturing sector shrank unexpectedly in February after two months of growth, mortgage approvals fell slightly in January, and take‑up of the Funding for Lending Scheme appears muted. Those weak indicators are strengthening the case for additional stimulus according to the article.
Investors should watch the MPC vote outcome (particularly whether QE is expanded by around £25 billion), any guidance from the Bank about the outlook for inflation and growth, and the publication of new figures on scheme take‑up and lending—data that the article suggests could confirm muted take‑up and ongoing weakness in small‑business credit and manufacturing.
Call 1300 880 160
Start a chat
Schedule a call
