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More quantitative easing possible as Bank predicts challenging 2012

Mervyn King leaves door open to further doses of electronic money as the latest Bank of England inflation report says UK will crawl through 2012

Sir Mervyn King left the door open on Wednesday to further doses of electronic money creation as the latest Bank of England snapshot of the economy said the UK would crawl its way through 2012.

Announcing the findings of Threadneedle Street’s quarterly inflation report, the Bank’s governor said it would not be until 2013 that the UK returned to its pre-crisis level of output and warned that there would be a “zigzag” pattern to growth for the rest of this year.

The Bank predicted a strong pick-up in output in 2013 and a slightly higher level of inflation than anticipated three months ago, but King warned that the economy was going through challenging times, in which “substantial headwinds” were hindering the recovery.

In the City, analysts were left divided by the report, with some expecting further asset purchases when the current £50bn quantitative easing (QE) programme ends in May and others convinced that the Bank would call a halt to at £325bn.

Michael Saunders, UK economist at Citigroup, said the Bank’s forecasts for growth were over-optimistic and he expected the Bank to extend QE to £400bn during the course of 2012.

However Sam Hill, analyst at RBC, said: “If there is significant downside news over the next three months then the monetary policy committee could announce further asset purchases; but if developments evolve in line with these latest projections then [we think] the default assumption should be in favour of the MPC taking no further action this year once the £325bn target has been achieved. Overall, therefore, we remain comfortable with our forecast for an end to asset purchases in May.”

The inflation report showed the economy slowing to a virtual standstill in the first half of 2012, but recovering later in the year as a result of the boost to real incomes provided by falling inflation. King, however, stressed the need to be patient.

“Although some recent business surveys suggest a brighter picture for activity at the beginning of this year, the fiscal consolidation and tight credit conditions at home, and the weakness of our major overseas trading partners, are acting as a drag on growth. The underlying need for repair of balance sheets means that the path of recovery is likely to be slow and uncertain.

“For much of this year, there is likely to be a “zigzag” pattern of alternating positive and negative quarterly growth rates reflecting the additional bank holiday for the Queen’s diamond jubilee, so that it will be harder than usual to interpret the official estimates of growth.”

The governor said QE was working, despite claims that the money created by the purchase of gilts was not finding its way from commercial banks into the economy. King said he was opposed to the Bank lending directly to specific sectors, because that would require a political decision that could only be made by the government.

King said that he appreciated the pain that had been inflicted on the public by the financial crisis and the subsequent recession, but defended the Bank’s conduct of policy. “We can take some reassurance from the fact that inflation is now falling. But we are still steering a course through choppy waters, and many people are experiencing difficult times. Many savers continue to receive negligible returns on their savings. Over a million more people are out of work than was the case four years ago. And those who are working have seen the purchasing power of their pay sharply reduced.”

The governor added: “These are the consequences of the painful adjustment prompted by the financial crisis, and the need to rebalance our economy. Unfortunately there is no easy remedy. We all want to return to a world with a more normal level of interest rates. But if we were to raise interest rates to such a level now, that would serve only to turn a gradual recovery into a recession, put more people out of work, and cut the value of assets on which many savers depend.” © 2012 Guardian News and Media Limited or its affiliated companies. All rights reserved. | Use of this content is subject to our Terms & Conditions | More Feeds