The Bank of England could be forced to inject vast sums into Britain’s economy within weeks to stop the economy drying up and to help to head off a double-dip recession, economists predicted today.
As the International Monetary Fund warned of a “dangerous new phase” for the global economy, the central bank published the latest minutes from its Monetary Policy Committee (MPC) and disclosed a “marked deterioration” in the economic outlook.
The minutes showed that the MPC voting by 8-1 against expanding the bank’s £200 billion asset purchase programme, with only Adam Posen, the American economist, calling for it to be stepped up.
But the document notes that for “most members” it was a “finely balanced” decision — and it made clear that another month’s bad news could see more funds issued under the quantitative easing scheme. The programme, which started in March 2009, involves the central bank buying government bonds to put money into the economy.
The Bank’s minutes showed that the MPC considered all options open to it, including the possibility of cutting interest rates below their current record low of 0.5 per cent. All nine members of the committee voted against that option.
The committee held its discussions two weeks ago against the backdrop of a series of surveys pointing to weaker growth in the second half of the year than the MPC had predicted in its key August inflation report.
Since then the outlook has only become more gloomy: the IMF yesterday cut predicted UK growth to just 1.1 per cent, prompting Nick Clegg, the Deputy Prime Minister, to remark that even though there is light at the end of the tunnel “that tunnel has just got longer”.
In a further blow, figures released today showed that net public sector borrowing hit £15.9 billion in August, a record for the month, despite the Government’s efforts to cut spending.
The Bank’s minutes gave no hint as to exactly when the Bank might fire up its printing presses again, but economists predicted that the MPC could change its mind as early as next month if the news does not improve.
There are also increased political calls for the Bank to act, including one today from the Energy Secretary, Chris Huhne, who backed his colleague Vince Cable in pushing for a monetary stimulus.
Scott Corfe, senior economist at the Centre for Economics and Business Research (CEBR), noted that the weakening outlook had also prompted calls for the Government to slow its deficit reduction programme, although that was a risky strategy given the financial markets’ fixation on public sector debt.
If politicians have their hands tied, however, the central bankers still have some room for manoeuvre and Mr Corfe said that Mr Posen’s colleagues on the MPC could soon come round to his way of thinking.
“Overall, we now think further quantitative easing is almost certainly on the cards in the UK – potentially with the announcement of an additional £50 billion in asset purchases commencing in the final quarter of this year,” he said in a note analysing today’s minutes.
“Although drastic changes in monetary policy usually take place in the same month as a new Inflation Report – the next one of which is due in November – the escalating economic crisis could force the MPC into an announcement next month. Posen may find himself with a few more followers in October…”