The Bank of England held off from more monetary stimulus to boost the economy today, despite fears that the UK could be about to be knocked sideways by chaos in the eurozone.
The Bank’s monetary policy committee voted to keep its £325 billion quantitative easing programme on hold after its two-day meeting, despite loud calls including from the IMF for the central bank to do more to support economic activity.
The move was met with surprise by some City analysts since a number of key economic indicators have pointed down since the MPC’s May meeting, when the nine-member committee voted to keep its stimulus on pause.
Andrew Goodwin, of the Ernst and Young Item Club, said: “It’s a modest surprise. Until last week staying on hold would have been the obvious decision. But the data at the end of last week and the general sense of the eurozone crisis moving into another phase suggested the need for further action.”
A snapshot of the manufacturing sector last week pointed to the biggest monthly fall in activity in May since the collapse of Lehman Brothers in 2008. However, a survey of the UK’s services sector, which makes up 75% of the economy, today showed a healthier picture. The Markit/Cips Purchasing Managers’ Index remained steady at 53.3 in May, with any figure above 50 indicating growth. Yet there were also signs of the eurozone crisis beginning to hit home, with the index of business confidence among services purchasing managers falling to its lowest level of the year.
The way MPC members voted will not be known until the minutes of the meeting are released in a fortnight. In May’s meeting only external member David Miles voted for more stimulus of £25 billion, but the minutes also said that several members saw the decision as “finely balanced” and that “further monetary stimulus could be added if the outlook warranted it”.
The International Monetary Fund last month urged the Bank of England to print more money in its annual report on the state of the UK economy. The IMF also said the MPC should look to buy up corporate bonds in order to increase the flow of credit through the economy.
The Bank’s governor, Sir Mervyn King, has so far rejected such a course of action. The Bank also kept its policy interest rate on hold today at the record low of 0.5%.
