Bank of England Considers Pumping New Money in U.K. Economy

Bank of England monetary policymakers arecurrently meeting to decide whether to pump more new money into the fragile U.K.economy.

Bank of England monetary policymakers are currently meetingto decide whether to pump more new money into the fragile U.K. economy. This decision comeson the heels of fresh stimulus measures taken by the Bank of Japan to bolsterits weak economy.

On Thursday the BoE is expected to hold its key benchmarklending rate at a record-low 0.50 percent after a two-day monetary policymeeting.

Last week the British Pound fell sharply after policymaker AdamPosen said the central bank should consider revving up the printing press andinjecting more money into the economy. He further warned that a slow responseby the central bank could curtail growth and push down deflation.

The BoE’s last foray into the world of quantitative easingended in February. Prior to the expiration, the central bank through its assetbuyback program created close to $317 of new money by purchasing governmentbonds and high-quality private sector assets.

Given the financial risks facing the U.K. economy at this time, theBoE’s Monetary Policy Committee is revisiting the policy this week in an effortto project growth in the economy with or without the stimulus.

Traders have been warning since the election in May that thepossibility of QE would have to be re-evaluated at a future date since the newgovernment implemented austerity measures that could slow down the economy’spositive momentum.

Traders fear that the new round of austerity measures, duefrom the government in two weeks, could drive the economy toward a double-diprecession. Some are forecasting a slash in spending by as much as 25 percent.

Although there are signs the economic recovery is fading,the deciding factor for the MPC will likely be the inflation figure. Ifinflation continues to remain strong then the BoE will not have to act asswiftly, and the current policy will be left on hold. Any weakness in growth asmeasured by inflation is likely to mean that more quantitative easing at theend of the year or the start of 2011.