The Bank of England may be forced to restart its quantitative easing programme.
The Office of National Statistics revealed this week that inflation fell to 3.4 per cent in May from 3.7 per cent in April. Artemis strategic bond fund manager James Foster says deflationary pressures will force the bank to inject more money into the economy in the short term.
He says: “As soon as there is an enormous cut in public spending and more quantitative easing, the private sector would get that artificial prop and could benefit from using the bond markets to grow businesses again.”
Fidelity asset allocation director Trevor Greetham says the Government will want to use quantitative easing to make sure private sector growth continues so the deficit can be reduced. He says: “If there is no inflation, the Government will be panicking. I think easing worked last time, it got assets and the economy moving, and I think we will need another dose of it.”
Neither could put a figure on any possible extra fiscal injections. Foster says: “The effect on sterling may be horrendous but the Government will do it because it can and it will have to.”