BoE holding off on taking action with no signs of growth rebound
THE Bank of England (BoE) decided it was too soon yesterday to step up efforts to bolster Britain's economy, although future action looks increasingly likely as growth shows little sign of rebounding after a dismal few months.
Britain's economy tipped into its second recession in four years at the end of 2011, and a multi-year austerity programme to close the country's vast budget deficit is weighing both on consumer morale and the government's popularity.
The bank restarted its asset purchase programme, which aims to lower big companies' capital costs, last month, and Wednesday marked the start of a joint scheme with the British finance ministry to reduce the cost of bank loans for home buyers and businesses.
Interest rates, likewise, stayed at a record low 0.5pc. But if economic data continues to disappoint in the way it has in recent weeks, the central bank may not have the luxury of waiting long before deciding on its next policy move.
"While the unchanged decision isn't a surprise, there is a question mark as to whether current policy settings are appropriate," said David Tinsley, UK economist at BNP Paribas.
British economic output shrank by 0.7pc in the second quarter, a much bigger fall than economists had expected, even taking into account the effect of an extra public holiday and months of wet weather.
Both the bank and Britain's coalition government blame the eurozone crisis for the fact that Britain has been in recession since late 2011. But Germany and France, which are at least as heavily exposed to the debt troubles on the euro currency have seen stronger growth over the same period.
Moreover, there is little sign so far of a hoped-for rebound in the third quarter from London's hosting of the Olympics.
Manufacturing activity fell at its fastest pace in more than three years in July, according to a survey of purchasing managers. While construction improved, builders warned of disruption to deliveries from the Games.
The one bright spot is strong job creation since the start of the year, which has pushed unemployment down to 8.1pc.
The BoE debated increasing its quantitative easing (QE) programme by £75bn (€95bn) rather than just £50bn (€63bn) in July, though two of its nine policymakers voted against any increase. Ben Broadbent and Spencer Dale wanted to see how the other new schemes to get credit flowing worked first.
Britain has not recovered the output lost during the 2008-2009 financial crisis and the central bank is carrying the burden of reviving the economy as the government's hands are tied by its pledge to erase a huge budget deficit.
Morgan Stanley's analysts now predict £100bn (€ 127bn) more in asset purchases and a rate cut, as they now forecast the overall economy to shrink by 0.5pc in 2012. (Reuters)