THE Bank of England appears to be leaving the door open for further quantitative easing (QE) to stimulate the struggling economy, with its latest forecasts showing benchmark annual inflation undershooting the 2% target on its favoured two-year time horizon.
In the wake of the forecasts in the Bank's latest quarterly inflation report, Howard Archer, chief UK economist at consultancy IHS Global Insight, said that base rates seemed set to remain at their current record low of 0.5% "until at least late-2013 and very possibly into 2014".
The Bank projects annual UK consumer prices index inflation of about 1.5% two years from now, even assuming base rates are held at 0.5% and the scale of QE remains at £325 billion throughout the two-year forecast period. QE is aimed at stimulating economic activity by boosting money supply through the purchase of Government and corporate bonds using central bank reserves.
The signal from the Bank's forecasts that its Monetary Policy Committee will be keeping an open mind on further QE pushed the pound below $1.60 yesterday, to an intra-day low of about $1.5887. Sterling closed in London on Tuesday at $1.6025.
Bank of England Governor Sir Mervyn King said: "The real question is how much monetary stimulus we inject into the economy - The MPC will have to make a judgment month by month as to whether it does or does not want to inject more monetary stimulus."
The Bank cut its near-term UK growth forecast still further yesterday. It projected that gross domestic product growth was "still a little more likely to be below its historical average than above it two years into the forecast period", and that output was "not likely to surpass its pre-crisis levels before 2014". It raised its forecasts of near-term annual CPI inflation, which stood at 3.5% in March. But the MPC, in setting interest rates, focuses on the two-year horizon.
Mr Archer said: "The inflation report contains the all-too-familiar and depressing blend of reduced GDP growth but raised consumer price inflation forecasts in the near term."
The Bank highlights again the risks to the UK economy from the eurozone debt crisis.
The MPC last boosted QE in February, by £50bn to £325bn.
Data last month from the Office for National Statistics showed the UK fell back into recession in the first quarter of 2012. A 0.2% fall in gross domestic product in the opening three months marked the second straight quarter of contraction. It followed a 0.3% drop in GDP in the fourth quarter of last year.
The European Commission on Tuesday revealed the 17-nation eurozone narrowly avoided renewed recession, with output flat during the first quarter.
Chris Williamson, chief economist at financial information company Markit, said: "The Bank - seems to be once again choosing to look beyond higher than expected inflation in the short term. Instead, current weak growth and the benign longer-term inflation outlook means the door is open for further quantitative easing, especially if the eurozone crisis, still seen as the main threat to the recovery, or other developments cause UK economic growth to disappoint compared to the Bank's target."
Referring to closely watched surveys of the services, manufacturing, and construction sectors, which Markit produces for the Chartered Institute of Purchasing and Supply, Mr Williamson said: "Note that even the PMI surveys, which have been more upbeat than official data so far this year, suggested economic growth had waned in April to a pace that would normally be consistent with further stimulus, based on historical relationships between the PMI and policy. The survey data suggest that uncertainty spreading from the euro area crisis is already infecting the already-weak UK economy to the extent that would justify more quantitative easing in the minds of many MPC members."
He added: "While economic growth this year is likely to be weaker than the Bank previously expected, the economy is forecast to be growing at an annual rate of 2.7% in two years' time. While below the Bank's prior estimate of 3%, this represents a relatively upbeat assessment of the speed with which the UK will recover in 2013."
Highlighting the economic turbulence, Sir Mervyn said: "We have been through a big global financial crisis, the biggest downturn in world output since the 1930s, the biggest banking crisis in this country's history, the biggest fiscal deficit in our peacetime history, and our biggest trading partner, the euro area, is tearing itself apart without any obvious solution. The idea that we could reasonably hope to sail serenely through this with growth close to the long-run average and inflation at 2% strikes me as wholly unrealistic."
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