Bank of England Seen Holding Rates; Easing Unlikely

The UK’s central bank, the Bank of England, is expected to hold interest rates at their current level of 0.5 percent on Thursday as the global economic crisis appeared to worsen and the International Monetary Fund warned that a second global recession could not be ruled out.

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

The IMF lowered its euro zone economic growth forecast to 2.3 percent this year and just 1.8 percent in 2012.

Warning a second global recession could not be ruled out, the IMF called on countries like Britain, France and Germany to borrow more in order to provide economic stimulus as a way to resolve the current crisis, arguing they should take advantage of historically low interest rates.

However, the prospect of the Bank of England entering the markets to provide further stimulus through more asset purchases – known as quantitative easing (QE) — was unlikely, analysts told, with a consensus expecting the Bank to wait until the publication of its quarterly inflation report in November.

The Bank has few tools available to help it improve the economic picture apart from more QE. The minutes of last month’s meeting of the Monetary Policy Committee (MPC) showed that QE was considered by the committee and that two of the committees more hawkish members had dropped their opposition to the Bank providing more capital liquidity to the market.

But most analysts believe the Bank will still wait until November in order to digest the Office of National Statistics’ (ONS) new economic calculations published on Wednesday which showed that economic growth in the second quarter of this year was even worse than previously believed.

ONS officials have changed the methodology for calculating UK gross domestic product (GDP) growth switching to the Consumer Price Index (CPI) from the more traditionally used Retail Price index (RPI). The change to the CPI had been expected to improve GDP growth forecast for the year to date, but instead showed not only that the recession had been deeper than previously predicted but that growth since the recession had been far more sluggish than originally believed. Economic growth for the second quarter was halved by the ONS to just 0.1 percent, while consumer spending fell by 0.8 percent.

Based on the figures released on Wednesday, economists saw a 40 percent chance that the Bank would launch QE on Thursday.

“I think there’s a 40 percent chance that we might see more quantitative easing this month but to be honest I suspect the bank will wait until it November when it has a better idea of how the economy is doing and when it will publish its next forecast,” Peter Dixon, economist at Commerzbank told “I think they {the MPC] will use the upcoming meeting to signal to the markets what they are likely to do.”

George Buckley, chief economist at Deutsche Bank, said: “We think the Bank will do nothing. The markets continue to be quite volatile but there’s not a huge amount the Bank can do about that. I’m putting a 40 percent chance on it launching QE at the moment.“

However, Graeme Leach, chief economist at the Institute of Directors, urged the MPC to launch more QE on Wednesday, saying the revised economic growth figures “make a very strong case to launch QE2. Firstly because they show just how perilous the recovery was in the first half 2011, and secondly because the back data also shows the recession was deeper than previously thought, with the implication that the output gap is still large enough to exert downward pressure on inflation.”

“More QE is on the way, the only question is how much,“ he added.

But Dixon was more skeptical about the impact that a further round of QE.

“I doubt the economic growth figures for the second quarter will make that much difference. The interesting thing is just how little the consumer spent in the quarter. That could be an indication that consumers are deleveraging, but it could also be because of a lack of income. If they are deleveraging then more liquidity in the form of QE is not going to help it will only help at the margin,” he said.

Buckley was equally skeptical that more QE would help to stimulate the economy.

“It’s only a quarter of what they did last time, which coming at a time when interest rates are already so low has got to be very limited in its impact but its better than doing nothing,” he added.