The Bank of England revealed yesterday that it is likely to introduce more quantitative easing (QE) into the economy over the coming months.
In the minutes from this month’s rate-setting meeting of the Monetary Policy Committee (MPC), it said “All members agreed that it was appropriate at this meeting to continue with the asset purchase programme announced at its previous meeting.
Although the minutes stated that all members of the nine-man MPC agreed not to extend the QE programme this month, the minutes noted that “some members” believed there was a good argument for adding to the asset purchase programme immediately.
The UK economy shrank by a revised amount of 0.5 per cent in the second quarter of 2012. This was influenced by the additional bank holiday for the Queen’s Diamond Jubilee and a severe contraction in the construction sector.
This is despite a further £50 billion being pumped into the economy in July taking the total to £375 billion. The consensus is that unless there is a big surprise and the economy improves dramatically in the next three months, then a further £50 billion will be added to the asset purchase programme in November.
The minutes stated that the MPC members want to wait and see if inflation remains stable in the next few months and assess the impact of the Funding for Lending Scheme (FLS) as the impact of FLS could limit the effectiveness of further QE.
The Bank of England still thinks it is more likely than not that inflation will fall below the central bank’s target of two per cent by the end of the year. This is despite a surprising increase in inflation announced on Tuesday that showed the consumer prices index (CPI) measure of inflation up to 2.6 per cent in July from 2.4 per cent in June.
There was little discussion of lowering base rate further from its record low of 0.5 per cent.
Howard Archer, Chief UK & European Economist at IHS Global Insight said: “The minutes of the August MPC meeting indicate that the Bank of England is highly likely to take further stimulative action to try and boost the struggling economy later this year. And the minutes also reinforce the view that while further Quantitative Easing is very much on the cards, an interest rate cut from 0.50% to 0.25% is a much longer shot.”