British economy moves closer to new stimulus injection

20th February 2013, Comments 0 comments

Britain's economy, at risk of a third recession in five years despite record employment, could see a fresh injection of cash stimulus, according to minutes of a Bank of England meeting published on Wednesday.

Bank of England (BoE) governor Mervyn King has called for more quantitative easing, minutes from the central bank's February meeting showed.

This helped push the pound to a near 16-month low point against the euro and London's FTSE 100 shares index to a five-year high in trading on Wednesday.

"2013 just goes from bad to worse for the pound as this morning's ... minutes came out with a surprisingly bearish vote of 6-3 against further asset purchases after 8-1 last time around," said Investec bank economist Victoria Clarke.

"This continues the snowball of gloominess which has been gathering pace against sterling with the downside risk now getting more worrying for the friendless pound."

Sterling has been hit in recent days also by market rumours that Standard & Poor's rating agency was preparing to cut its top AAA long-term credit rating for Britain. S&P has however declined to comment on the speculation.

Traders were meanwhile mulling over mixed British employment data.

According to the Office for National Statistics (ONS), employment in Britain has hit another record high point, with 29.73 million people in work at the end of December.

Despite this, the unemployment rate edged higher to 7.8 percent over the same period from 7.7 percent in the three months to November, the ONS added.

Recent data meanwhile showed that British gross domestic product shrank by 0.3 percent in the fourth quarter of 2012 compared with the previous three months.

Another contraction in the current first quarter of 2013 would place Britain in a so-called "triple-dip" recession.

Against such a backdrop, the BoE's nine-member Monetary Policy Committee voted 6-3 to keep its QE cash stimulus amount at £375 billion ($574 billion, 429 billion euros), according to minutes from their February 6-7 gathering.

However, outgoing chief King was joined by fellow MPC members David Miles and Paul Fisher in calling for another £25 billion in QE.

The British pound struck multi-month lows on Wednesday as the minutes stoked fresh concern over inflation and the economic outlook, dealers said.

Sterling slumped to 87.64 pence per euro -- which was the lowest level since late October 2011. It also dived to a seven-month nadir of $1.5282.

And on the stock market, London's FTSE 100 index of leading companies surged past 6,400 points for the first time in more than five years.

Under quantitative easing, the Bank of England creates cash that is used to purchase assets such as government and corporate bonds with the aim of boosting lending and in turn economic activity.

At the same time, QE can stoke inflation as it is tantamount to printing money.

British 12-month inflation stood at 2.7 percent in January for a record fourth month in a row -- above the government-set target of 2.0 percent.

"February's MPC minutes provided another clear demonstration of the Committee's increasingly flexible approach to inflation targeting," said Samuel Tombs, economist at the Capital Economics research group.

"We continue to think that more QE is only a few months away."

Wednesday's minutes added that BoE policymakers were unanimous earlier this month in freezing the bank's key interest rate at a record-low 0.50 percent -- where it has stood since March 2009, or almost four years.

© 2013 AFP

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