05/02/2012 06:43 GMT

Bank Of England To Increase Quantitative Easing (QE) This Week

The Bank of England is widely expected to pump billions of pounds into the UK economy this week despite signs that the UK's financial health may be starting to improve.

The Bank's Monetary Policy Committee (MPC) is forecast to increase its quantitative easing (QE) programme by £50 billion to £325 billion on Thursday in a bid to stave off a recession, while it will also hold interest rates at record lows of 0.5%.

Many economists had previously expected the MPC to inject an even greater sum into the economy but surprisingly upbeat industry surveys for January have forced some to revise down their estimates.

The closely watched Markit/CIPS surveys showed that the manufacturing sector returned to growth in January, while the powerhouse services sector saw a record leap in optimism.

Malcolm Barr, an analyst at JP Morgan, had previously forecast an injection of £75 billion but said the "much firmer than expected" data meant he now pencilled in a £50 billion boost instead.

Alan Clarke, UK and eurozone economist at Scotiabank, said the survey data "seriously puts the cat amongst the pigeons ahead of next week's Bank of England decision".

But he added: "We have had our doubts for some time that the next QE instalment would be as big as £75 billion. Our view has been that £50 billion was a better bet."

Despite the upbeat data, most analysts also insisted it was still too early to call a recovery after respected thinktank NIESR recently warned that the UK economy would shrink by 0.1% in 2012 amid weak investment and uncertain conditions.

The economy contracted by 0.2% in the final quarter of 2011, sparking fears that the UK would fall back into another recession - defined as two successive quarters of falls - albeit a much milder one than previously.

The Government and Bank have both placed much of the blame for the UK's economic difficulties on the troubles in the eurozone, which still have no clear resolution.

But the MPC has in recent months held fire on boosting QE as it waited for the asset purchases unveiled in October to be completed.

Business leaders - such as the British Chambers of Commerce - have called for further QE and are likely to back an increase on Thursday.

However, the decision will raise fears over the impact on pension funds as QE can fuel inflation, which would spell more gloom for savers who have already seen the value of their pots eroded by the high cost of living and low interest rates.

But the expected deterioration in the economic outlook means it is more likely that inflation - which fell to 4.2% in December - will undershoot the 2% target in the medium term.

Howard Archer, chief UK and European economist at IHS Global Insight, said: "It is far from certain that January's apparent pick-up in economic activity can be sustained and relapses remain a very real risk given still appreciable domestic and international, mainly eurozone, headwinds."