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Thursday, the Bank of England is expected to raise the size of its quantitative easing measures to GBP 225 billion to aid the ailing economy. Also, the central bank is set to maintain the key rate at a historic low. The announcement is due at 7.00 am ET.
At the end of its two-day rate setting meeting, the Monetary Policy Committee is widely expected to retain the official Bank Rate paid on commercial bank reserves at 0.5%. This has been the lowest rate since the central bank was established in 1694.
Economists expect the bank to announce an increase in the size of asset purchase scheme by GBP 50 billion following its current meeting. As on October 29, the central bank has purchased GBP 174.8 billion worth assets.
The British Chambers of Commerce urged the MPC to raise the QE measures immediately by at least GBP 200 billion, with the option of additional increases later on. David Kern, BCC's Chief Economist said, along with considering a negative interest rate on deposits held by commercial banks at the BoE, the MPC and the government need to consider other radical measures to boost lending.
According to ING economist James Knightley, a small majority at the Bank of England will vote to pump in an extra GBP 50 billion into the economy. Also, BNP Paribas said the disappointing GDP figures and a further slowdown in M4 raises the likelihood that the BoE will raise the budget allocated to purchases of assets.
The quantitative easing measures were first initiated on March 5 by launching GBP 75 billion asset purchase programme using central bank reserves. Later on, the measure was raised to GBP 125 billion on May 7 and then to GBP 175 billion on August 6.
At the August meeting, policy makers were split over the amount by which the asset purchase has to be increased. Governor Mervyn King, Tim Besley and David Miles sought a GBP 75 billion increase to GBP 200 billion. But all policy makers stood united in maintaining the size at GBP 175 billion in the succeeding meetings.
Adding pressure on the MPC, the British economy failed to exit recession in the third quarter, while other major economies already showed signs of recovery. The economy is undergoing its longest streak of contraction on record, with a 0.4% sequential GDP decline in the third quarter.
The BCC said the critical factor that delayed an exit from recession is the difficulty small and medium-sized firms experience in obtaining adequate finance. As such, the MPC need to act more aggressively, said Kern.
Now, the MPC will have more information about inflation outlook from the Inflation Report that is set to be released on November 11. Annual inflation had slowed to a five-year low of 1.1% in September and stood below the central bank's 2% target for the fourth straight month.
Although bond purchases are intended to raise the amount of money in the economy, M4 money supply growth eased to 11.6% year-on-year in September from 12.3% in the previous month.
Meanwhile, recent PMI survey showed that service sector activity growth in October was the strongest in over two years. Boosted by a rise in output and new orders, the manufacturing PMI also rose to a two-year high. According to the Nationwide Building Society, British consumer confidence remained static in October at 72.
Elsewhere, the Frankfurt-based European Central Bank is set to announce its decision at 7.45 am ET. The ECB is widely expected to to hold its key interest rate unchanged for the sixth straight month at 1%. The ECB is also set to continue its extraordinary measures for the time being, though calls for setting exit measures have strengthened.
Yesterday, the Federal Open Market Committee maintained the target range for the federal funds rate at 0 to 0.25%. The Australian central bank became the first among the G-20 nation to hike its interest rate in October. It raised the rate further by 25 basis points to 3.5% at its November meeting.
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