Bank of England warns of economic 'headwinds'

Bank of England
Image caption Interest rates have been at 0.5% since March 2009

"Substantial headwinds" to economic recovery remain, the Bank of England's Monetary Policy Committee has said.

But there was "some evidence that credit conditions were easing" as the mortgage market was boosted by the state-backed Funding for Lending scheme.

It also noted a "modest improvement in global growth prospects".

The minutes of its January meeting showed it voted by 8 to 1 not to extend its quantitative easing (QE) programme.

The Bank has injected £375bn into the UK financial system through QE. Under QE, the Bank creates money and uses it to buy government bonds to try to stimulate the economy.

Funding for Lending

The Bank added that the state of the UK economy in 2012 had been "difficult to gauge" because of one-off events such as the Olympics and extra bank holidays.

However, it said there were positive signs in that lower funding costs to banks as a result of the Funding for Lending scheme, which was launched at the start of August, had started to pass through to lower loan rates.

The Bank has been offering cheap funds to banks and building societies, provided it is then lent to individuals and non-financial companies. The aim of the scheme is to increase bank lending by roughly £60bn.

But the minutes showed that the policymakers of the UK's central bank were concerned by "the drag to activity from fiscal consolidation, a further squeeze in household real incomes, and the deterioration in UK competitiveness over the past couple of years".

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The MPC was also concerned by the value of the pound, saying that the currency's fall in value in 2007-08 had failed to boost trade by much, which suggested that it might still be "above the level compatible with the necessary rebalancing of the economy".

"The existence of a significant current account deficit at a time of depressed activity and considerable spare capacity could imply that the sterling real exchange rate was higher than the level compatible with external balance," the minutes said.

Dissenting voice

Monetary Policy Committee member David Miles was the only member to vote to increase the size of the asset purchase programme - by a further £25bn to a total of £400bn.

He argued that "the degree of slack in the economy... meant that it was probably possible to achieve higher output growth without causing any material inflationary pressure".

Official figures for fourth-quarter economic growth are due to be released on 25 January, which may raise the prospect of a triple-dip recession in the UK.

In the minutes, the Bank added to those expectations by saying that "the unwind from the Olympic Games was expected to depress headline GDP growth significantly in the fourth quarter".

The UK economy grew by 0.9% in the three months to September, helped by the Olympics during the summer.

The economy has been in and out of recession since the financial crisis took hold in 2008.

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