Bank boosts QE by £50bn as outlook worsens

5 July 2012 | By Gary Jackson

At the monthly meeting of the Monetary Policy Committee, its nine members voted to expand its asset purchase facility to £375 billion while maintaining the base rate at 0.5%.

Analysts had expected the Bank to increased QE by £50 billion, although a £75 billion move was not ruled out.

Last month, four of the committee’s members voted for additional QE - including Mervyn King, the Bank’s governor. Since then, a number of factors have convened to strengthen the case for more easing.

A statement by the Bank says: “UK output has barely grown for a year and a half and is estimated to have fallen in both of the past two quarters. The pace of expansion in most of the United Kingdom’s main export markets also appears to have slowed.

“Business indicators point to a continuation of that weakness in the near term, both at home and abroad. In spite of the progress made at the latest European Council, concerns remain about the indebtedness and competitiveness of several euro-area economies, and that is weighing on confidence here.

“The correspondingly weaker outlook for UK output growth means that the margin of economic slack is likely to be greater and more persistent.”

Indicators have remained weak, suggesting the economy could have contracted for a third quarter running. Business survey show that activity in the construction sector - which is blamed for pushing the UK back into recession - contracted during June, while service sector activity declined by more than expected.

In addition, inflation has fallen since the MPC last met, which removes one of the main barriers to embarking on further easing. The consumer prices index stood at 2.8% in May, down from 3% in the month before. The Bank expects inflation to continue to fall below its 2% target rate.

Howard Archer, chief UK and European economist at IHS Global Insight, says: “On the interest rate front, it is notable that at their June meeting, the Bank of England discussed the case for lowering interest rates from the current level of 0.5% for the first time since last September.

“However, for the time being at least the MPC is sticking to the view that there is not a compelling case that lower interest rates would have an overall beneficial impact, and would not have any advantages over more QE.”

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