Bank of England expected to hold QE despite new mandate

Finance minister George Osborne tweaked the central bank’s mandate two weeks ago, giving it stronger backing to continue ignoring inflation when it overshoots its target due to one-off factors, reports The Telegraph.

But only a handful of economists polled by Reuters last week expect the central bank to add this month to the £375bn of government bonds it bought between March 2009 and October 2012.

“For as long as you say there is a 2pc inflation target, I think what we have got at present is about as close as you can get without breaching the spirit of that,” said Ross Walker, UK economist at Royal Bank of Scotland.

Other economists only see a chance of more stimulus once Mark Carney – currently Canada’s central bank chief – becomes governor of the Bank of England in July.

Mr Carney is believed to favour other ways to help the economy such as long-term promises of low interest rates.

Inflation has mostly been above target since the start of the financial crisis due to one-off price shocks – for example, higher sales tax – and the Bank of England’s desire to avoid a surge in unemployment by tightening policy prematurely.

Inflation rose to 2.8pc in February, and the bank does not forecast it to fall below 2pc until early 2016.

However, the economy has been stagnant over the past two years. After a 0.3pc contraction in the past three months of 2012, it risks tipping into its third recession in less than five years.

That risk will be greater if a survey of the service sector in March, due at 8.30am, shows the same decline as its counterparts for manufacturing and construction published earlier this week.

These conflicting pressures from high inflation and very weak growth help explain why the Bank of England’s nine-member Monetary Policy Committee has been unusually split at its past two meetings.

BoE Governor Sir Mervyn King, markets expert Paul Fisher, and external MPC member David Miles all voted for an extra £25bn of bond purchases, but failed to convince their other six peers.

Mr Walker said he expected the impasse to continue. “If there wasn’t enough to budge them in February, there’s not enough to make them move tomorrow.”

March’s policy minutes did not suggest either camp’s position was softening. Indeed some opposed to more stimulus saw a new reason: the danger that looser monetary policy could trigger a further slide in sterling.

Last month sterling hit a two-and-a-half year low against the dollar and was some 8pc down since the start of the year, until the minutes and comments from Sir Mervyn that the currency was fairly valued helped stem its slide.

However, a slim majority of economists think the Bank of England will restart asset purchases – perhaps as soon as May, when fresh quarterly economic forecasts may sway waverers.

Failing that, the next milestone will the change of leadership at the Bank of England at the end of June.

“More stimulus should be on its way soon – although we may have to wait for Mr Carney to arrive first,” said Vicky Redwood, UK economist at Capital Economics.

Meanwhile, the European Central Bank is also expected to hold interest rates on Thursday but investors will be looking for any signs it is preparing for a cut in coming months to help lift the euro zone out of recession.

Despite a recent drop in economic sentiment and falling inflation, a Reuters poll of 73 economists showed little change in expectations, with rates set to remain at 0.75pc – tiny, but still the highest level among the world’s major central banks.