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UK Economy: Bank Of England Expected To Hold Back On Quantitative Easing

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The Bank of England is expected to hold back from pumping more cash into the economy despite the deepening threat posed to the UK by the eurozone debt crisis.

Its Monetary Policy Committee (MPC) is forecast to leave interest rates at their record low of 0.5% and the stock of quantitative easing at £325 billion, although the decision is set to be a close call.

The meeting comes as the pressure mounts on political leaders to draw up a firm action plan to tackle the mounting eurozone crisis as Spain appears to move closer to taking an EU bailout and a crucial election in Greece moves nearer.

bank of england qe

The Bank of England is expected to hold back from more QE

And if a closely watched survey of the important services sector in the UK released hours before members make their decision shows a contraction it could prompt the Bank to fire up its money printing presses again.

A contraction of the services sector would add weight to fears that the economy is deteriorating after the manufacturing sector suffered a shock contraction in the second biggest decline in the 20-year history of the Markit/CIPS survey.

Industry data, such as the Markit surveys, have until recently painted a much more upbeat picture of the economy than official figures, which is why last week's manufacturing data came as such a shock and a contraction in the services sector may be crucial to the Bank's decision.

Howard Archer, Chief UK and European Economist at IHS Global Insight, said they expected the Bank of England to "hold fire": On balance, we lean towards the view that the Bank of England will hold fire on more Quantitative Easing at its June meeting, but we certainly would not rule it out. We suspect that it will not take much more bad news on the growth front for the MPC to pull the QE trigger again and the dismal May manufacturing purchasing managers’ survey has provided a significant prod."

Simon Hayes, an analyst at Barclays Capital, said: "If the services sector PMI published on Thursday morning were to show a similarly precipitous fall, the MPC is likely to give serious consideration to a QE expansion."

However, the City only expects the Markit data for the services sector released today to show a slow-down in growth rather than a contraction.

Mr Hayes does not believe such a performance would be enough to press the Bank into more action. He does not expect more QE until August when he predicts a £50 billion injection.

The MPC's decision last month as to whether to expand its quantitative easing programme was "finely balanced", he said.
Pressure on the Bank to implement more stimulus measures has been mounting in recent weeks after official figures showed the UK's double-dip recession was deeper than previously thought with a 0.3% fall in the first quarter of 2012.

IMF boss Christine Lagarde also called on the Bank to lower interest rates further to help the UK weather the eurozone debt crisis.
Inflation continued to fall in April, providing more leeway for a fresh money injection.

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