The Bank of England looks set to cut interest rates by half a percentage point to a record low of 0.5 percent next week and start buying assets with newly created money to boost the economy. Fifty-four out of 62 economists polled by Reuters this week predicted a 50 basis point reduction when the Monetary Policy Committee concludes its 2-day meeting at 1200 GMT on March 5. Below are a range of points likely to feature in the Monetary Policy Committee's discussions.
QUANTITATIVE EASING
All nine MPC members voted in favour of embarking on a policy of quantitative easing at February's policy meeting and Governor Mervyn King has already asked finance minister Alistair Darling for permission to do so.
Policymakers say there is not enough money flowing through the economy and this is why lending to households and businesses has remained tight, even as interest rates have come down sharply. They hope that boosting the money supply will solve that problem.
An exchange of letters between King and Darling is expected to be published before the MPC meets next week, in which Darling will set a limit on how much money the BoE may create to buy up government bonds (gilts) or commercial assets.
Only then will policymakers be able to decide when to launch a programme of asset purchases.
The central bank may start off by buying UK government bonds, but could eventually extend its purchases to include commercial assets, like corporate bonds.
It already buys commercial paper under its Asset Purchase Facility, but this is financed by issuing Treasury bills and therefore does not increase the supply of money.
Analysts have been trying to figure out how much the central bank will be allowed to spend, with estimates in a Reuters poll ranging from 60 billion to over 140 billion pounds.
INFLATION
The BoE predicted last month that consumer price inflation would fall to just 0.5 percent — well below its 2 percent target in 2 years' time if interest rates were to follow market expectations.
And policymakers have now even started to worry about the prospect of deflation — a broad-based drop in prices that can lead to a downward spiral of demand — which is why they are keen to take unconventional measures to prop the economy.
LABOUR MARKET
The number of people out of work crept up to just below 2 million in the three months to December and some experts reckon the total could hit 3 million later this year as a severe contraction in demand forces companies to axe jobs.
MPC member David Blanchflower reckons one in ten Britons could be without work next year and called on the government to pump 90 billion pounds into the economy to stem job losses.
GROWTH
Britain entered recession at the end of 2008 for the first time since the early 1990s and the BoE predicts the downturn will continue for most of this year. Some policymakers have highlighted the downside risks to their forecasts, noting it is impossible to say deep and prolonged the recession will be.
A second reading of GDP this week confirmed the economy shrank by 1.5 percent in the last three months of 2008.
However, the fall in output in the third quarter was worse than previously thought, and surveys suggest manufacturing and services activity is still decelerating sharply.
STERLING
Britain's weaker currency, should in theory, provide a boost to exports by making the price of UK-made goods more attractive. However, there has been little evidence of that yet, with manufacturers reporting a sharp fall in demand from overseas markets.
CONSUMER SPENDING
Retail spending appears to have held up surprisingly well, growing by a stronger-than-expected 0.7 percent in January. However, sales volumes may have been boosted by aggressive discounting over the Christmas and New Year period and are likely to suffer in the coming months in an environment of rising unemployment.
HOUSE PRICES
House prices are continuing to plunge at a double-digit rate and many analysts reckon they have further to fall as rising unemployment and restrictive lending conditions take their toll.
However, official data showed approvals have improved modestly from a record low and a survey by the Royal Institution of Chartered Surveyors indicated a pick-up in interest from prospective buyers.
