The economic landscape has darkened markedly since the BoE suspended its bond purchases with newly created money in May, and it was already on the verge of restarting the programme last month.
Since then, the government and BoE have announced joint measures to improve the flow of credit to businesses and to ensure banks do not suffer from a lack of ready cash if the eurozone crisis persists.
Now economists polled by Reuters see a 75 per cent chance of more gilt purchases this month, with the main debate over whether the Monetary Policy Committee will go for £50bn over three months or £75bn over four.
“Arguably the worst-case fears in Europe have not been realised but there’s enough out there to confirm the view that the outlook has clouded,” said Lloyds economist Adam Chester. Data last month showed British economic output had fallen more steeply over the past 12 months than previously assumed, and indicators since then have shown contraction in manufacturing and an unexpected rise in unemployment claims.
Inflation has also dropped more than expected to a two and a half- year low of 2.8 per cent to reduce one of the main barriers to further stimulus – the fact that inflation has been above the BoE’s 2 per cent target since December 2009.
Most economists expect the BoE to raise its target for gilt purchases – also known as quantitative easing – by £50bn to £375bn. This would be more in line with the scale of previous BoE stimulus, but Mr Chester argues the case for a £75bn rise.
The BoE generally likes decisions on QE to coincide with its quarterly economic forecasts, which are published in February, May, August and November.
A four-month programme of purchases would take the BoE through to November, and tallies with the four-month, £75bn scheme announced when the BoE started its second round of QE in October 2011, Mr Chester said.
But this would mark a big advance from last month, when three policymakers – including BoE Governor Mervyn King – supported a £50bn increase, and one backed an extra £25bn. But five opposed further QE, suggesting other stimulus measures were at least a partial substitute.
Moreover, with an EU summit agreeing greater support for eurozone banks and the election of a Greek government that is broadly supportive of austerity measures, the eurozone has for now avoided the worst-case scenario of a disorderly Greek exit.