Region’s firms showing reluctance to invest

Two Bank of England policymakers unexpectedly dropped their calls for higher interest rates, it was revealed in documents published yesterday.

Bank chief economist Spencer Dale and former academic Martin Weale, who had called for tighter policy for the past six months, voted with the majority to keep rates at a record low this month, largely due to a tougher economic outlook.

“The slowing in world demand growth and the heightened tensions in financial markets meant that the balance of risks to the medium-term inflation outlook had clearly shifted to the downside,” the minutes of the Bank’s August Monetary Policy Committee meeting said.

Only long-standing dove Adam Posen has called for more quantitative easing this month, but other policymakers considered it and said further asset purchases might be needed if risks to Britain’s economy materialised, the minutes showed.

Government bond prices rallied and sterling fell after the publication of the minutes, which coincided with official data showing British unemployment rose at its fastest pace in more than two years in July.

“The hawks have thrown in the towel at last,” said Nida Ali, an economic adviser to accountants Ernst & Young. “More quantitative easing has gone from being a mere back-up option to being a genuine possibility in the near future.”

Most economists viewed the minutes as flagging up the prospect of QE in future, but thought it was only likely to take place if the global economy takes a sharp turn for the worse.

“We see the ‘bar’ for additional quantitative easing as high with inflation still expected to reach 5 per cent over the coming months,” said David Page of Lloyds Corporate Markets.

The Bank has held rates at a record low of 0.5 per cent since March 2009, and between then and January 2010 it bought £200bn of financial assets, mostly gilts, with newly created money.

A senior figure at the Institute of Directors in Yorkshire said the economic picture in the region was mixed, with many firms deciding not to hire full-time staff because of the economic uncertainty.

Charlotte Britton, the chairman of the West Yorkshire Branch at Institute of Directors, said last night: “Historically the Institute of Directors has supported quantitative easing.

“In the current economic climate of slow economic growth, the euro zone debt crisis, tensions in the financial markets and inflation increasing, further options need to be considered.

“This is the L-shaped recovery, in the wake of a financial crisis, which the Institute of Directors has consistently forecast over the past two years.

“With the recent GDP figures, it only increases the likelihood of further quantitative easing”

Ms Britton added: “A lot of people in the Yorkshire business community are saying they are having peaks and lows but there’s no reason for it.

“A lot of people are very cautious about the next few months and still not spending on big investment projects. They are looking at different ways to recruit, if they are at all, such as job sharing, so they have greater flexibility. Some people are only recruiting on short term contracts, as they don’t want the overheads or worry of taking on full time staff.

“The digital sector is doing well, however. I was at an event at lunchtime as part of the Leeds Digital Festival and a lot of people were buoyant about business.”

Bank’s inflation forecast

The Bank’s quarterly Inflation Report, which was published last week, showed that inflation is still expected to peak at five per cent later this year, more than double the Bank’s two per cent target, due to a supposedly one-off mix of higher sales tax and energy costs.

However, the Bank also cut its forecast for inflation in two years’ time, a key policymaking variable, to 1.7 per cent from 1.9 per cent, and cut its annual growth forecasts for the next eight quarters by about 0.4 percentage points on average.

Bank Governor Mervyn King has said the euro zone debt crisis poses the single biggest threat to Britain’s economy.