Faced with a stalling economy, the probability that the Bank of England will launch a second round of government bond purchases has crept up to one in four from one in five over the last month, according to the latest Reuters poll.
The poll of 63 economists, conducted mostly after news the UK economy grew by just 0.2 percent in the second quarter, rounding off a nine-month period of effective stagnation, also saw a tailing off in the probability of a rate hike this year.
There is now just a median 30 percent chance the Monetary Policy Committee raises rates this year from the current record low of 0.50 percent, down sharply from 55 percent in the previous poll and 70 percent in a poll taken ahead of its June meeting.
While economists expect a rise in the first quarter of next year, the poll shows them more in line with City of London trading desks, which are betting that the first interest rate hike is a year off or even longer.
“The BoE will take a baby step in the dovish direction in terms of its forecasts in the August Inflation Report ... (but) not screaming out emergency that policy response is required,” said Alan Clarke, economist at Scotia Capital.
“At the moment our working assumption is we do get a bounceback (in growth), but if it doesn't happen QE2 will be more plausible.”
The dramatic fall in rate expectations over the past month comes ahead of a period of planned deep government spending cuts and shows the intense pressure on policymakers to keep a very brittle economy from cracking.
It coincides, too, with concerns that the US economy, caught up in a bitter political dispute over its borrowing limit that could lead to a sovereign debt downgrade, may be slipping back into recession.
Expectations for UK rates are very similar to those in the US, where the Federal Reserve, which has conducted $2.3 trillion worth of government bond purchases, is expected to leave rates near zero well into next year.
The European Central Bank, by contrast, has raised interest rates twice already this year in the face of a spiralling sovereign debt crisis there that has led to bailouts for Greece, Ireland and Portugal worth hundreds of billions of euros.
WILL MORE QE DO ANY GOOD?
Many question how much 200 billion pounds of government bond purchases, known as quantitative easing (QE), did to help the economy. The BoE launched that programme in early 2009 and made its last purchases in early 2010.
But most agree that with rates near zero, the BoE has little else at its disposal.
Business secretary Vince Cable this week broke a taboo by speaking openly about policy conducted by what is supposed to be an independent central bank, calling for another round of QE if the economy remains weak.
Some economists have been sceptical about how far-reaching the positive effects of QE have been, with growth still meagre and inflation at more than double the BoE's two percent target.
While the economy has flatlined over the past nine months, inflation soared to a recent peak of 4.5 percent in April and could top 5 percent in coming months, albeit mainly due to a huge hike in tariffs by UK energy providers.
It is also clear that some economists who track the UK economy are starting to get worried that something more sinister is going on than just weak growth in a period of great economic uncertainty around the globe.
“If the MPC has not raised rates by mid-2012, or is not on the brink of doing so, there is something seriously wrong with the economy, and we would be justified in discussing Japanese-style stagnation,” said Peter Dixon, economist at Commerzbank. - Reuters