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By Rebecca Clancy | Published May 18, 2012

Further monetary stimulus likely, say economists

Simon Ward, chief economist at Henderson Global Investors, said the quarterly report, released on Wednesday (May 16), had suggested that the central bank’s move not to increase its asset purchasing programme beyond £325bn earlier in the month was “tactical” as it waited for the “full horror” of the eurozone crisis to be revealed.

“The Bank of England is reserving its ammunition until the fallout from the eurozone crisis becomes clearer,” he said.

The Report downgraded the Bank’s growth forecast from 3 per cent to 2.6 per cent, while maintaining a projection of below-target inflation, for two years’ time. The mean inflation expectation for two years ahead, based on interest rates remaining at 0.5 per cent, is 1.8 per cent.

Mr Ward said this month’s delay in implementing further quantitative easing (QE) had also left the door open for co-ordinated action with other central banks.

Vicky Redwood, chief economist at Capital Economics, agreed that the escalating crisis would be key in deciding when the Bank next resumed QE. “The Inflation Report struck a gloomy tone, suggesting that sticky inflation is preventing the MPC from doing anything to offset the deterioration in the growth outlook,” she said.

“Our overall impression is that it would not take much to tip the balance towards doing more QE.

“We still expect QE to be resumed later this year – and even within the next month or two if the eurozone crisis continues to escalate.”

Bank governor Mervyn King held a press conference as the Inflation Report was released.

Kames’s fixed income boss Stephen Jones said Mr King had appeared to be “as dovish as ever” and ready to support the UK with “whatever action is necessary”.

He said: “The press conference accompanying the release continued to emphasise to us that further quantitative easing is very much a possibility given a subdued long term inflation outlook and the continuing political and economic malaise that exists in Europe and dogs the UK’s economic outlook.”

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