Bank of England debating more stimulus

LONDON — The Bank of England is deciding whether to pump billions more pounds into the ailing British economy.

LONDON — The Bank of England is deciding whether to pump billions more pounds into the ailing British economy.

Bank watchers are split on whether the nine policymakers will announce more stimulus on Thursday, or wait another month.

There is growing pressure on the Bank to resume quantitative easing whereby it essentially creates new money by buying financial assets from institutions even though inflation is running at 4.5 per cent, more than double the Bank’s target of 2 per cent.

With the debt crisis in Europe becoming more acute, signs of a reluctance among banks to lend to each others and consumers reluctant to spend, the Bank of England is debating a loosening in policy, just a few months after the consensus in the markets was that it would be looking at when to start raising interest rates from their super-low levels.

Jane Foley, an analyst at Rabobank International expects the Bank “to sit on its hands until November” when it will be armed with its latest quarterly projections that will include the forecast that inflation will drop sharply next year, providing rate-setters “with the necessary ammunition to loosen policy.”

Though inflation is higher than hoped amid sky-high energy costs and sales tax rises, the British economy is stalling as it gets buffeted by the problems in the euro area.

Figures released Wednesday showed the British economy grew by only 0.1 per cent in the second quarter, half the previous estimate. It managed little or no growth in the previous six months.

The Bank spent 200 billion pounds ($310 billion) on quantitative easing between March 2009 and January 2010, and it believes that helped pull the economy out of a deep recession triggered by a global banking crisis.

American economist Adam Posen has been alone among the nine Monetary Policy Committee members to vote for another 50 billion pounds in asset purchases, but minutes of the September meeting signalled a shift in sentiment with “most members” agreeing that the case for more stimulus had strengthened.

With the base rate at an all-time low of 0.5 per cent and the government cutting spending, quantitative easing is the one of the only remaining big levers left in the Bank’s armoury to jolt the economy to life.

Alistair Darling, who was Treasury chief during the first round of quantitative easing, was skeptical about the impact of another round.

“On its own, another 50 billion pounds of quantitative easing is not going to do the trick,” Darling said in a BBC radio interview.

“Unless you do something to address the lack of confidence in the economy, which is really holding back businesses … then my fear is we are going to have a long period of no growth whatsoever and that will mean that the day on which we can actually reduce our borrowing is going to be put off again and again.”

Simon Hayes, an economist at Barclays Capital, said more stimulus would be most effective if the United States and Europe were also pursuing expansionary policies, as they were in 2009.

The European Central Bank is also meeting Thursday and is also under pressure to loosen policy even though inflation is running ahead of target. However, because it has raised borrowing costs twice this year, it has room to reduce interest rates.