Bank of England to restart printing presses as outlook dims

by Jul 5, 2012

LONDON (Reuters) - The Bank of England is expected to fire up its printing presses for a third round of economic stimulus later on Thursday just two months after shutting them down.

Policymakers have essentially been forced to act by an increasingly gloomy economic climate. They have already pumped 325 billion pounds into the economy, which nonetheless fell back into recession at the turn of the year.

A raft of gloomy data nearly led the policymakers to push the button again last month, after the Bank had stopped its quantitative easing bond-buying in May.

The Monetary Policy Committee was narrowly split on June's decision, with Governor Mervyn King in the minority voting for more QE, as the darkening British and euro zone outlooks plays increasingly on policymakers' minds.

A Reuters poll taken last week found all but two of the 55 economists questioned said the Bank would announce new bond buying market this week, with most expecting an additional 50 billion pounds injection.

June was one of Britain's worst months in over three years, purchasing managers' surveys showed this week, cementing views that the Bank would be forced to act.

"It confirms the subdued nature of economic activity in the UK and the need for more monetary stimulus," said David Page at Lloyds Banking Group, who sees the BoE's asset purchases eventually reaching a total 500 billion pounds -- or about one third of Britain's GDP.

King, in his final year as governor, has warned that a "black cloud of uncertainty" was keeping businesses and consumers from spending, while driving up banks' funding costs

The 17-nation euro zone, Britain's main trading partner, has struggled to quash a debt crisis that began in Greece over two years ago sending its economy sliding while threatening to bring the whole union crashing down.

But a European Union summit last week agreed greater support for euro zone banks and the election in Athens of a government broadly supportive of austerity measures means the euro zone has for now avoided the worst-case scenario of a Greek exit.

Inflation, above the central bank's two percent target since December 2009, fell in May to 2.8 percent and the unexpected easing to a 2-1/2 year low will have reduced one of the main hurdles to further stimulus.

"A rapid return of inflation to target makes the MPC's job of selling further QE that much easier," said Simon Hayes at Barclays, who sees it on target in the second half.

The Bank slashed interest rates to a record low of 0.5 percent over three years ago and according to the latest Reuters poll it will be 2014 at least before they move. (Editing by Jeremy Gaunt.)

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