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Bank 'on hold' over further QE

15:05, Oct 3 2012

 

Bank of England policymakers are expected to hold off from any further economy-boosting moves on Thursday amid mixed signs for the recovery.

This month's interest rate meeting comes after a run of disappointing purchasing manager surveys in manufacturing, construction and services, suggesting an expected rebound to growth in the third quarter is far from guaranteed.

But experts still believe the Bank's Monetary Policy Committee is most likely to keep interest rates at their record low of 0.5% and hold back from any further quantitative easing (QE), having already pumped £375 million into the economy.

Bank governor Sir Mervyn King insisted just last week that there were "a few signs" of recovery while official figures revealed a second upward revision to gross domestic product for the second quarter to a better-than-feared decline of 0.4%.

Philip Shaw, chief economist at Investec Securities, believes the Bank will increase QE in November after the last £50 billion round announced in July is completed.

He said: "At this juncture, the committee is effectively in 'on hold' mode, albeit with a bias towards easing, and a move next week is probably off the cards - the Bank rate is very likely to remain at 0.5% and the QE target at £375 billion. It is far more likely that the MPC will wait until November's meeting for a serious review of policy, at which point it will have completed its current QE programme."

In surveys this week, manufacturing output shrank at a faster pace in September than the previous month, construction output also declined and the services industry saw its rate of growth slow down. Last week, however, retail figures from the CBI showed a welcome rise in sales for this month after a disappointing August performance.

The bank will also be watching its funding for lending programme closely to see whether further QE is needed, with early encouraging signs of its scheme to free up the log-jam in lending. It recently revealed that 13 banks and building societies have signed up and that it is seeing tentative signs that credit is being boosted.

There have also been doubts cast over the usefulness of more QE, with the bank's deputy governor Paul Tucker saying QE may be losing its "bite" and whether printing more money would be worth the risk to inflation. Consumer prices index inflation has more than halved to 2.5% from 5.2% last September, but is forecast to start rising again by the end of the year, which could make the bank cautious about pushing the button on more QE.

Howard Archer, chief UK and European economist, said: "We believe the odds are still heavily slanted towards more Bank of England stimulus in the fourth quarter. Although the economy is currently showing some signs of improvement and inflation could be sticky over the coming months, it is extended weak economic activity rather than inflation that remains the greatest risk facing the UK economy."

 
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