Bank of England keeps stimulus steady as UK economy slips

Thu Jan 12, 2012 10:42am EST
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By Olesya Dmitracova

LONDON (Reuters) - The Bank of England stopped short of announcing further stimulus for Britain's fragile economy on Thursday, but is widely expected to do so in February as the economy may have shrunk at the end of last year.

Britain is at risk of recession as global growth slows, government spending cuts bite and all-important consumers struggle with high inflation, tax hikes and slow wage rises.

And with the government's hands tied by its pledge to erase the country's large budget deficit in order to defend its top credit rating, the onus is all on the central bank.

British industrial output, which accounts for around 15 percent of the economy, posted a surprise fall in November, data showed earlier on Thursday. According to some economists, that added to signs of an economic contraction in the final quarter of 2011.

However, Britain's National Institute of Economic and Social Research estimated that the economy still grew in the period, albeit very slightly.

The finance ministry gave a cautious welcome to the estimate, saying in a statement: "We should be realistic about the risks; the uncertainty in the euro area continues to have a chilling effect on the UK as well as elsewhere."

Either way, analysts see a strong case for the BoE to expand its 275 billion pound asset-buying quantitative easing (QE) program, aimed at boosting growth.

"Overall 50 billion pounds more QE next month seems to us to be virtually 'baked in the cake'," said Investec economist Philip Shaw. "Steep declines in inflation should facilitate a further 50 billion pounds of asset purchases in May, taking the QE target to 375 billion pounds."   Continued...