Bank poised to play waiting game

Rate-setters at the Bank’s Monetary Policy Committee (MPC) look set to hold off from more quantitative easing (QE) when they vote on Thursday, following the economy’s surprise 0.3 per cent growth in the first quarter.

Economists expect that the GDP figure will be enough to persuade the Bank to maintain asset purchases at £375bn, while also holding interest rates at their record low of 0.5 per cent. Britain’s prolonged economic malaise has forced the Bank to look for alternative ways of boosting the economy, including the Funding for Lending Scheme (FLS), which aims to increase credit for households and companies by incentivising banks to lend to them.

Policymakers recently beefed up the FLS by increasing the amount of low-interest funding that banks can access – providing they lend it on to small firms.

They also widened the scheme to take in finance houses and leasing corporations that target small companies.

The FLS overhaul and recent encouraging signs from the economy should be enough to keep the nine-strong MPC in wait-and-see mode, economists believe.

Better-than-expected UK services figures last week showed activity in the sector leapt ahead again in April, driving forward growth for the wider economy and boosting hopes of a sustained recovery. Services growth added to encouraging surveys from the manufacturing and construction sectors.

Part-nationalised lenders Royal Bank of Scotland and Lloyds Banking Group also reported stronger first-quarter trading last week – with falling bad debts – boosting hopes over their return to the private sector.

That followed the better-than-expected 0.3 per cent growth in the first quarter – driven by the UK’s dominant services sector – which ensured Britain avoided a damaging triple-dip recession.

Investec economist Philip Shaw said there is “less urgency” for the Bank to restart asset purchases. He said: “The 0.3 per cent quarterly increase in GDP in the first quarter, while arguably not making a material change to the outlook, has taken some of the pressure away from the committee to do something now on the economy.”

The vote could even see governor Sir Mervyn King and fellow policymakers David Miles and Paul Fisher reverse their calls for another £25bn of QE.

But many economists still believe persistent weakness in the economy and the risk that Europe’s sovereign debt crisis could quickly snuff out a recovery are likely to mean the Bank resumes QE – although possibly after the arrival of new governor Mark Carney in July.

National Australia Bank economist Tom Vosa said: “The majority of the committee would want to wait and see how the extension to the Funding for Lending Scheme will work through the system.

“We could get a further extension of QE following Mark Carney’s arrival but this is now becoming increasingly data-dependent.”

IHS Global Insight economist Howard Archer said: “We believe it is still more a question of when the Bank of England will pull the quantitative easing trigger again, rather than will they.

“The economy is still far from buoyant and with fiscal policy tight and global growth muted and stuttering, there is still a strong case for further support.”

And while there are fears that more QE will add to stubbornly high inflation, Chancellor George Osborne has given the Bank a looser remit in meeting its two per cent inflation target. This means the Bank has more scope to support recovery through stimulus injections, despite fears inflation could hit 3.5 per cent in the summer.