Billions more likely in QE as Mervyn King sounds new alert

The Bank of England is gearing up to pump billions more into Britain's economy amid further dire warnings from Governor Sir Mervyn King over the health of the recovery.

Today's quarterly forecasts underlined worsening gloom for the UK as a result of Europe's debt crisis, paving the way for more quantitative easing to kick-start a stalling economy, possibly as soon as next month.

The Bank is already pumping an extra £75 billion into the economy after its latest round of QE last month. But it now reckons prospects are so poor inflation will still come in below its 2% target in two years' time. The latest forecasts signal growth of just 1% next year, with inflation falling rapidly from the current 5% to about 1.2% by 2013.

Interest rates have been at their current 0.5% record low since March 2009, when the Bank launched its first £200 billion round of QE.

Capital Economics economist Samuel Tombs said: "The report both endorses market expectations that rates will stay on hold for the foreseeable future and suggests that more policy loosening will yet be needed.

"What's more, even the MPC's [Bank of England monetary policy committee's] downgraded growth forecasts still look optimistic to us - we expect zero growth next year. We had pencilled in another £75 billion of QE in February, but if the economic news over the next couple of weeks remains weak, the MPC might feel compelled to announce extra support as soon as next month."

The Governor again underlined that Europe remains the UK's biggest threat as the woes of the nation's biggest export market hamper efforts at recovery. He stressed today that the Bank's forecasts do not fully factor in any substantial escalation of the crisis, implying that there could be even worse pain ahead for the UK economy

"The uncertainty that has been created in the European and world economy by recent events must have, or is likely to have, some potential impact on the pace at which businesses will make investment projects - will they postpone projects - and on the pace of household spending. That is almost impossible to forecast, but it is something that we shall watch very carefully," King warned.

The eurozone managed growth of just 0.2% between July and September, but is set to fall back into recession in the final quarter with a knock-on impact on the UK.

Markit economist Chris Williamson warned: "There is clearly a significant risk of a contraction in the final quarter of this year and early next year, with a steep downturn possible if the problems in the euro area worsen."