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More Stimulus for UK After Cut in Growth Forecasts?

The UK’s central bank has cut its medium-term growth forecasts leading some analysts to believe that a further round of quantitative easing is on the cards.

Governor of the Bank of England Mervyn King
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Governor of the Bank of England Mervyn King

The Bank of England has revised targets for growth downwards to 2 percent in two years’ time, which is a sharp reduction from a forecast of 2.67 percent just three months ago.

Peter Westaway, Chief European Economist at Vanguard Asset Management told CNBC the Bank of England was in a difficult position and more stimulus would be announced soon.

“I think we’re going to wait until the (current round of quantitative easing ) gets done and then at the next inflation reports press conference, the next policy decision for November, that will be the time when we might hear a decision about more QE,” he told CNBC Wednesday.

“I think it’s sort of a 50-50 chance at the moment, maybe a little bit more.”

Mervyn King didn’t rule out any monetary stimulus during Wednesday's announcement but seemed cool on a potential cut in interest rates. He suggested that the bank will wait and see how the current Funding for Lending scheme and asset purchase programs work before any action was taken.

“There are measures we can take in the future and further asset purchases will clearly be one of them. That’s something we will look at each month as we come to it,” he said.

The BoE altered its mid-term growth forecast but left the prediction for mid-term inflation almost unchanged at 2 percent. A prediction that King said was “broadly balanced”.

Guy LeBas, Chief Fixed Income Strategist at Janney Montgomery Scott said this could mean that more stimulus wasn’t necessarily inevitable.

“That suggests that their inflation outlook is actually a little bit more elevated than potential downside risk,” he told CNBC Wednesday.

“That was a pretty poignant comment suggesting that stimulus over in the U.K. is by no means a given at this point.”

Governor Mervyn King himself suggested that the forecast for inflation over the next two years does not suggest “an urgent need for further action”.

But econmists at Capital Economics had a different point of view, saying that the cut in growth forecasts only heightened the need for action.

“[The report] supports our view that more policy stimulus is likely once the current asset purchases are completed in November,” the firm said in a statement.

“Accordingly, the door is clearly open to more stimulus and we still expect both more QE and a further interest rate cut in November.”