BoE mulls more QE as economy falters

LONDON Wed Dec 21, 2011 9:32am EST

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LONDON (Reuters) - Bank of England policymakers left the door open for a new cash injection into Britain's economy in February, central bank minutes showed, as the raging euro crisis and gloomy consumers risk pushing the economy into another recession.

Austerity measures to tackle a hefty fiscal deficit are further straining consumer spending but there was some relief for the government on Wednesday as data showed the budget deficit narrowed more than expected in November.

Minutes to the BoE's December 7-8 meeting showed that all nine policymakers saw little merit in an immediate increase in asset purchases, given high uncertainty about the euro zone and the impact of quantitative easing (QE).

However, some members of the bank's Monetary Policy Committee signaled their readiness to boost the economy further.

"Some members continued to note that the balance of risks to inflation in the November Inflation Report projections meant that a further expansion of the asset purchases program might well become warranted in due course," the minutes said.

"Of those members, some thought that the outlook had deteriorated somewhat on the month," they said.

Others, however, continued to see a risk of inflation falling more slowly than expected, noting continued strength in import and goods inflation.

Analysts said the minutes confirmed the view in financial markets that another cash injection was likely in February.

"They still have a dovish tone but the chances of a policy change in January have receded a little bit further after this, and our forecast is for more QE in February," said RBS economist Ross Walker.

All nine members of the Monetary Policy Committee voted to maintain the target level of quantitative asset purchases at 275 billion pounds and keep the key interest rate at a record low 0.5 percent.

With the government's hands tied by its pledge to balance the books, the central bank remains under pressure to support the economy.

The government's policy to erase a budget deficit of nearly 10 percent of GDP is weighing on growth and, despite some progress, the country risks losing its top-credit rating as public finances remain too stretched to absorb further shocks.

"Government borrowing has come under even greater scrutiny following yesterday's warning from Moody's regarding the UK's AAA credit rating," said Markit economist Chris Williamson.

Late last month finance minister George Osborne had to announce further austerity measures as the gloomy growth outlook meant he would have to borrow much more than projected in his original austerity plan.

In a stark reminder that even the new plans may not be tough enough, rating agency Moody's said on Tuesday that Britain was running out of room to deal with further shocks from the euro crisis without losing its cherished triple-A rating.

RECESSION FEAR

BoE Deputy Governor Charles Bean and chief economist Spencer Dale have both indicated that they would want to wait until the current program of gilt purchases runs out at the end of January to assess the need for further stimulus based on the BoE's updated forecast in February's Inflation Report.

But Paul Fisher indicated that more quantitative easing may be necessary to boost an economy on the brink of recession.

Britain's economy has barely grown over the past year and both the government and the central bank see growth of below 1 percent in 2012.

BoE policymaker Ben Broadbent warned on Tuesday that the country faced a "material risk" of recession, though the minutes repeated the central bank's main view that output was set to remain broadly flat until mid-2012, before recovering somewhat.

Gloomy news from the economy has continued to take its toll on consumers, already reluctant to spend as inflation at 4.8 percent and the government's spending cuts are squeezing household budgets.

Consumer morale fell to its lowest level in December since the height of financial crisis in February 2009, a survey showed on Wednesday.

The BoE minutes also showed that the risks from the euro zone crisis loomed large, driving up banks' funding costs and increasing market volatility.

The central bank's December meeting took place before a key summit of European leaders, where initiatives to fix the euro crisis were seen as insufficient by many in the markets.

The minutes repeated policymakers' assessment that fine-tuning policy was not the right option given the uncertainties.

(Additional reporting by Keith Weir, Olesya Dmitracova and Matt Falloon; Editing by Susan Fenton)

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