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Fear of dip may force B of E action

Monday, March 04 07:37:34

Having sat on its hands since last summer, the Bank of England is coming round to the view that it may need to do more to stop Britain's stuttering economy lurching back into reverse.

A growing number of economists reckon another 25 billion pounds of government bond buying is in the offing, possibly as soon as this week's meeting of the bank's Monetary Policy Committee which ends on Thursday.

A Reuters poll of economists taken Feb 26-28 showed a 40 percent chance of the bank opting for more so-called quantitative easing this week and a 60 percent chance before the year is out.

Since the poll was conducted, an unexpected contraction of UK manufacturing in January and weak mortgage lending has made the March 7 decision an even closer call.

"We expect the Bank of England will vote to restart QE at the March meeting - or if not then, soon after," said Michael Saunders, UK economist at Citi.

With fiscal policy hamstrung by the government's austerity drive and banks continuing to shrink their balance sheets, hopes for an economic recovery lie squarely on the central bank's shoulders.

In the past week, the drip-feed of dismal economic data has been accompanied by signs that policymakers are willing to consider more action, including more radical policy options, pushing sterling to its lowest level against the dollar since mid-2010.

Deputy governor Paul Tucker raised the controversial idea of the BoE charging banks to park money at the central bank, something that could spur them to lend more to companies in an attempt to boost growth. Tucker said it would be "an extraordinary thing to do" and his fellow deputy governor Charles Bean stressed there was no concrete plan to do it.

Britain's economy has flat-lined over the last two years and is at risk of sinking into a triple-dip recession this quarter.

Its sluggish performance has come despite the BoE spending 375 billion pounds on gilts in the past three years. As a proportion of national income, the BoE's QE effort far outstrips that of the Federal Reserve. ( C) Reuters