Bank of England remains sceptical UK economy can make solid recovery in 2010

• Fresh wave of financial unrest could dash recovery hopes
• Economy needs to rely more on exports

Larry Elliot 

guardian.co.uk, Wednesday 23 December 2009 19.42 GMT 

Bank of England is to keep quantative easing programme under review Photograph: Andy Rain/EPA


The Bank of England is leaving the door open to a new year £200bn money expansion programme after revealing that it remains unconvinced about the economy's ability to emerge from the deepest and longest recession on record.

Minutes of the December meeting of Threadneedle Street's monetary policy committee indicated that the nine-strong body is adopting a watch-and-wait approach amid concerns that an unrelenting credit crunch and a fresh wave of financial unrest abroad could put paid to Britain's recovery hopes.

The MPC said evidence that the economy was on the up after six successive quarters of falling activity were matched by downbeat signs. All nine members of the committee voted to keep borrowing costs on hold at 0.5% and to keep the quantitative easing programme – due to end in February – under review.

Sterling fell following publication of the minutes, with many City analysts convinced that interest rates will remain on hold at their lowest ever level.

Jonathan Loynes, chief European economist at Capital Economics, said: "We continue to expect interest rates to remain at their current level until the end of 2010, if not considerably longer."

Howard Archer, chief UK economist at IHS Global Insight, said: "The MPC are clearly keeping all of their policy options open going into the new year and further quantitative easing remains a possibility, particularly given the major uncertainties and risks surrounding both the growth and inflation outlooks."

Official figures released today for the service sector, which accounts for 76% of the economy, expanded by 0.1% in October following growth of 0.5% in September. Even so, the Bank said the immediate prospects for the economy remain unclear.

The MPC expressed concern about the crisis in Dubai and the downgrading of Greece's credit rating. "There was a risk that protracted weakness in these countries could dent export prospects."

Over the medium term, the UK economy needed to rely less on the consumer and public spending and more on exports, however, the minutes said, there was little evidence of this trend emerging.

MPC members cited stronger investment and consumption, coupled with the upward revision to growth in the third quarter, as evidence that economic conditions were improving. But these were felt to be minor developments when set against medium-term uncertainties.