A renewed contraction in the fourth quarter is unlikely to trigger any action from the Bank of England policymakers in the face of heightened inflation concerns and hopes of positive signs in the euro area underpinning the U.K. economy.
The Monetary Policy Committee is expected to maintain the quantitative easing at GBP 375 billion and the interest rate at 0.50 percent. The announcement is due on Thursday at 7.00 am ET.
Although the bank is expected to retain the current stimulus, economists say the BoE will reinvest the redeemed gilts again in the asset purchase program.
At the January meeting, David Miles repeated his call for a GBP 25 billion increase in QE, while all other members saw limited stimulus to the economy from further easing.
IHS Global Insight's chief UK economist Howard Archer said he sees a very real possibility that the BoE will ultimately provide another GBP 50 billion sometime during the first half of the year as economic recovery is set to remain fragile.
Mark Carney, who is set to take over the chair as BoE governor at the start of July, has voiced his opinion on having nominal GDP targeting as a way to manage monetary policy expectations. His treasury committee hearing tomorrow will throw light on his views on changing the monetary framework from the inflation targeting.
Even if Carney does not push strongly for a growth objective, he is likely to sound keen on the idea of introducing more flexibility into the existing inflation target regime, said Vicky Redwood, chief UK economist at Capital Economics.
The economy shrank 0.3 percent in the fourth quarter, making the modest recovery in the third quarter to be short-lived. The National Institute of Economic and Social Research this week downgraded its 2013 growth outlook to 0.7 percent.
The U.K. inflation rate was at 2.7 percent in December and it is seen staying above the 2 percent target through this year. The BoE's new estimates for inflation and GDP will be released with the Inflation Report on February 13.
As a silver lining in the cloud, the Funding for Lending Scheme is poised to boost lending and support the economy going forward.
by RTT Staff Writer
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