The Bank of England will keep interest rates at record lows and go ahead with its planned £75 billion asset buying programme after its meeting on Thursday, but is expected to hold off on any further stimulus until the affects of the current programme can be assessed.
In October, the Bank announced that it would extend its £200 billion quantitative easing measures by injecting a further £75 billion into the economy through the purchases of gilts, or long-term government bonds. The news spelled disappointment for some, as interest groups such as Save Our Savers argued that the move would keep interest rates artificially suppressed and hurt households who were diligently saving.
However, as the eurozone crisis rages on and renewed risks of recession take hold, many expected the bank to pump even more cash into the economy. While the economy grew an unexpectedly large 0.5% in the third quarter, the services sector slowed throughout October while the manufacturing sector contracted at its fastest pace since the middle of the recession.
Some economists estimate that the bank will eventually spend a total of £350 billion on its quantitative easing programme, but that there is little chance of additional money now on the heels of October’s £75 billion announcement.
The Bank proceeded with its current stimulus move despite inflation reaching 5.2% in December, much more than double the Bank’s target of 2%.
In a surprise move, the European Central Bank has mirrored the Bank of England by cutting interest rates in an effort to boost eurozone growth. However, even with a low 1.25% base interest rate, economists still predict that the single-currency bloc – and Britain’s largest trading partner — will fall into recession.
Policymakers Paul Fisher and Martin Weale have warned of Britain’s economy as well, saying that it could contract in the final financial quarter of 2011. Should that happen, a double-dip recession is more than likely, experts say.
Bank of England governor Mervyn King has also said that despite the Bank’s announcement in October, more easing may be necessary as Britain is facing the worst financial crisis since the 1930s Great Depression. Economists say that the responsibility of boosting the economy lies with the Bank, as the coalition government is tied to an austerity programme that would erase the budget deficit of 10% of gross domestic product (GDP).
Still, the government is under huge pressure to induce growth in the economy, with opposition parties as well as leading economists urging the Chancellor to ease austerity.