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QE2 forecast to set sail next year as fears over growth take hold

Economists are predicting that the Bank of England will increase quantitative easing by at least £50bn in the new year.

The Bank once again voted to hold interest rates at 0.5% and maintain quantitative easing at £200bn this month.

Last week the British Chamber of Commerce reduced its forecast expectations for UK gross domestic product growth in 2011 to 1.9%, down from 2.2%, and is predicting £50bn more in quantitative easing next year.

David Kern, chief economist at the BCC, says: “Threats of a setback to growth will remain more serious than risks of a surge in inflation during the next 12 to 18 months. We assume that the Monetary Policy Committee will keep the base rate at 0.5% until at least Q3 2011.

“Given the risks of a setback to growth in the first two to three quarters of 2011, we expect the MPC to increase the quantitative easing programme from £200bn to £250bn before the middle of next year.”

Vicky Redwood, senior economist at Capital Economics, predicts 2011 will see the launch of so-called QE2.

She says: “It might take a parti-cularly sharp slowdown in the economy for additional quantitative easing to be announced in February, as we have been assuming. But even if we have to wait a bit longer than February, QE2 is probably not that far off.

“Unless inflation expectations take off, we think it unlikely the MPC will raise interest rates next year.”

Ray Boulger, senior technical director at John Charcol, says worries about the Eurozone will also increase the likelihood of quan-titative easing increasing next year.

He says: “As the markets con-tinue to pick off one Eurozone country after another, with exposed banks having to write off more bad debts as ’mark to make believe’ accounting can no longer be used to hide the problems, the potential negative impact on our economy is worrying.

“All this increases the likelihood that QE2 will need to sail next year.”

Last week the Halifax house price index showed house prices fell by 0.1% in November.

In the three months to November prices were 2.1% lower than in the preceding three months.

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