Bank of England chiefs edge closer to new stimulus package
Bank of England rate-setters have signalled they are leaning towards further emergency measures to prop up the economic recovery.
The minutes of this month's meeting of the monetary policy committee (MPC) showed members voted 8-1 to leave interest rates at a record low of 0.5% and to keep the Bank's programme to boost the money supply at £200bn.
But the report showed that some members thought the probability that further action will be necessary to stimulate the economy and keep inflation on track to hit the 2% target in the medium term had increased. The report comes a day after the US Federal Reserve kept the door ajar for further asset purchases or quantitative easing should the economy require it.
Members of the MPC also considered an argument from Andrew Sentance for a "well-communicated policy of gradually increasing the rate". Dr Sentance was alone in voting in favour of an increase to 0.75%.
The minutes said stubbornly high inflation, currently at 3.1%, and weak private sector demand could create difficulties. The Bank is worried that a prolonged period of above-target inflation will cause inflation expectations to drift up, making it more costly to bring inflation back to target.
It is also concerned that private demand will not grow sufficiently quickly to replace the waning boost from cuts in public spending, increasing the margin of spare capacity in the economy and causing inflation to fall materially below the target in the medium term.
The Bank's report described both key risks as substantial and said members stood ready to respond in either direction as the balance of risks evolved.
Experts at Capital Economics said: "The chances of additional monetary policy stimulus in the form of more QE have increased significantly."
Howard Archer, chief economist at IHS Global Insight, said interest rates were likely to remain at 0.5%.
He said: "Specifically, we forecast the first interest rate hike to 0.75% to come in the fourth quarter of 2011 and see interest rates still only at 1% at the end of next year.
"Meanwhile, a revival of quantitative easing is looking ever more likely."