Inflation-wary Bank of England to halt money-printing press

[1]

The Bank of England looks set to call a halt to its asset-buying programme on Thursday, despite the economy having slipped into recession and renewed risks rising from the eurozone debt crisis, as UK inflation remains stubbornly high.

Ending its programme of quantitative easing, or QE, may make life more difficult for Britain's Conservative-led ruling coalition, which was battered in local elections last week and relies on loose monetary policy to soften the pain of austerity measures aimed at cutting the country's huge public borrowing.

But after buying 325 billion pounds of government debt with newly created money, 50 billion pounds of which has been purchased in the last three months, the bank is likely to judge that its policy stance is already supportive enough.

Policymakers, most prominently deputy BoE governor Paul Tucker, have also indicated that inflation may not fall as fast as forecast below the bank's 2 per cent target after it rose for the first time in six months in March, touching 3.5 per cent, the highest rate in the Group of Seven major advanced economies.

The minutes of the Monetary Policy Committee's (MPC) April meeting showed that inflation worries had become more dominant, and that long-standing quantitative easing advocate Adam Posen had dropped his vote for more QE.

Bank of England Governor Mervyn King has also said that the economy looks set to recover slowly and steadily later this year while inflation is too high.

Still, Thursday's decision could be a close call. "If the MPC wants to expand QE, it has no shortage of justifications," Barclays economist Simon Hayes said. "Recent weeks have brought a procession of bad news."

The economy shrank 0.2 per cent in the first three months of 2012, putting Britain officially back into recession, while previously more upbeat business surveys showed slowing growth. The eurozone crisis has also flared up again with turmoil in Greece.

"And yet, inflation has not been at the 2 per cent target for more than two years," Hayes said, adding that more asset purchases may do little to kick-start sluggish demand or ease the dangers from the euro zone debt crisis.

"Under this cloud of doubt the MPC may prefer to hold fire unless a fresh crisis, or more prolonged weakness in demand, makes the case for QE irresistible," he added.

The central bankers will base their decisions on updated growth and inflation forecasts, which King will announce next week.