Bank of England facing crunch decision

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Bank of England policymakers meet this week to decide whether the eurozone's worsening debt crisis means they will have to pump up Britain's recession-hit economy with even more billions of new cash.

The bank's rate-setting Monetary Policy Committee (MPC) will likely consider the option at its latest monthly meeting on Thursday, when it is also widely expected to keep its key lending rate at a record low 0.50 percent.

A string of recent weak data has raised questions about the health of the British economy, which faces headwinds from falling consumer spending, austerity cuts and the debt crisis in major trading partner the eurozone.

The eurozone's dangerous sovereign debt crisis, which has snared Greece, Ireland and Portugal, is now circling Spain, sparking fresh fears of contagion across the 17-nation bloc and beyond. Britain is not a member of the eurozone.

Against this backdrop, many economists believe the MPC could re-start its Quantitative Easing (QE) policy, under which it has so far injected £325 billion ($525 billion, 406 billion euros) of new money into the economy.

Under QE, the bank creates new cash to purchase assets such as government and corporate bonds with the aim of boosting lending and economic activity.

“Economic data and surveys over the last month appear overall to have boosted the case for more QE while events in Greece and the eurozone have intensified the uncertainty and downside risks surrounding the growth outlook,” said Howard Archer, chief Europe economist at IHS Global Insight consultants.

“On balance, we lean towards the view that the Bank of England will hold fire on more QE at its June meeting but we certainly would not rule it out.

“We suspect that it will not take much bad news on the growth front for the MPC to pull the QE trigger again,” Archer added.

Policymakers voted unanimously in to leave policy on hold at their May meeting but one MPC member again called for more stimulus and the decision not to expand QE was described as finely balanced.

“The minutes of May's meeting showed that the decision (on) ... Quantitative Easing was pretty close,” said Vicky Redwood, an analyst at Capital Economics research group.

“The news since then has strengthened the case for doing more. Our hunch is that the committee will take more action this month.

“But even if it continues to 'wait and see,' we expect QE to be resumed before long,” Redwood said.

Since the May meeting, the BoE has slashed its forecast for British growth and warned that the eurozone debt crisis is the biggest threat to recovery - even if a credible solution is found.

The economy is now expected to grow by just under 1.0 percent this year, down from the BoE's previous forecast of just over 1.0

percent, it said last month.

Annual inflation will meanwhile remain stubbornly above the BoE's 2.0-percent target until mid-2013.

“The Bank of England is clearly maintaining an open mind and a flexible approach to whether more QE will be needed despite bringing it to a halt in May,” Archer said.

“It is evident that the MPC will closely review its decision in June and over the coming months in light of whether or not the economy shows evidence of underlying improvement and how sticky consumer price inflation proves to be.”

Recent data showed the British economy shrank 0.2 percent in the first quarter, after a 0.3-percent contraction in fourth quarter of 2011, hit by fallout from the eurozone crisis.

That put Britain firmly back in recession, which is defined as two successive quarters of contraction.

The BoE is working with the government and the Financial Services Authority watchdog on contingency plans for a potential break-up of the eurozone. - Sapa-AFP


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