Bank of England to decide over stimulus

PUBLISHED : Wednesday, 06 March, 2013, 2:14pm
UPDATED : Wednesday, 06 March, 2013, 2:17pm

The Bank of England must decide this week whether to pump out more cash stimulus to boost a British economy at risk of its third recession since the 2008 global financial crisis.

BoE policymakers holding a regular monthly meeting that concludes on Thursday will also vote on whether to change the level of its main interest rate, which has remained at a record-low 0.5 per cent for four years.

Minutes of the central bank’s meeting in February showed that its outgoing governor Mervyn King unsuccessfully advocated for more stimulus, known as quantitative easing.

“The outcome of the March meeting of the Bank of England’s Monetary Policy Committee (MPC) looks to be balanced on a knife edge,” said Howard Archer, chief UK & European economist at the IHS Global Insight research group.

“There is certainly a very real possibility that the MPC could go for more stimulative action to try and help the long-suffering economy. This would most likely take the form of another 25 billion pounds (HK$293.3 billion) of quantitative easing, which would take the stock up to 400 billion” (HK$4.7 trillion).

Hopes that Britain could avoid a triple-dip recession were boosted on Tuesday, the eve of the start of the BoE meeting, after data revealed a rebound in the country’s services sector, helping to offset poor construction figures also published this week.

The latest Markit/CIPS purchasing managers’ index (PMI) published on Tuesday showed a reading of 51.8 in February -- which marked the strongest rise in activity for five months.

Vicky Redwood, chief UK economist at consultancy Capital Economics, said the figure could well be the “decisive factor” that ensures the MPC opts against more stimulus, which it provides essentially by printing of new money.

“Had the survey fallen sharply, those on the MPC wanting to do more quantitative easing might have mustered a majority. But the rise in the services activity balance probably tips the balance towards the MPC doing nothing,” she added.

The BoE’s nine-member Monetary Policy Committee voted 6-3 at its February meeting to keep its QE cash stimulus level at 375 billion pounds (HK$4.4 trillion). King was joined by fellow MPC members David Miles and Paul Fisher in calling for another 25 billion pounds in QE -- a policy that began in March 2009, when the bank’s main interest rate was also slashed to 0.5 per cent.

Under quantitative easing, the Bank of England creates cash that is used to purchase assets such as government and corporate bonds with the aim of boosting lending and in turn economic activity.

QE can stoke inflation however as it is tantamount to printing money.

Recent data showed that British gross domestic product (GDP) shrank by 0.3 per cent in the fourth quarter of last year compared with the previous three months. Another contraction in the first quarter of this year would officially place Britain in a “triple-dip” recession.

Against this backdrop, Moody’s ratings agency last month lowered its top-level AAA credit rating for Britain. Moody’s downgraded Britain by one notch from AAA to Aa1, arguing that government debt was still mounting and that growth was too weak to reverse the trend before 2016.