The Bank of England looks set to leave monetary policy unchanged on Thursday ahead of a key EU summit to resolve the euro zone debt crisis which threatens to tip Britain back into recession.
Britain's economy is already losing steam fast due to a lack of economic confidence and weak export markets -- in line with the Bank's forecasts last month that described the effect of a euro zone break-up as impossible to quantify.
French President Nicolas Sarkozy and Germany's Angela Merkel will lay out a plan on Friday to anchor stricter budget discipline in the euro area, aiming to restore market trust in the bloc.
In a bid to insulate Britain's banking system, last week the Bank took part in international central bank efforts to make dollar funding more easily available, and on Tuesday it readied a new scheme to provide sterling liquidity.
However, banks saw no need to tap the Bank for 3-month dollar funds at their first offering on Wednesday. And for now economists expect no change to the 75 billion-pound, four-month programme of gilt purchases the Bank embarked on in October when it relaunched quantitative easing.
The Bank treats liquidity and monetary policy operations separately, and most economists doubt there will be monetary policy changes before the existing QE purchases are complete.
Certainly I think they will end up waiting until February, said George Buckley, an economist at Deutsche Bank. I don't think much has changed. Surveys point to very flat growth -- or possibly even negative.
The Bank announces its monetary policy decision at 1200 p.m. British time.
Data on Wednesday showed the biggest fall in British industrial output in six months. This capped a week of generally poor data, including a drop in a key measure of pre-Christmas high-street sales, falling house prices and slowing construction activity. Stronger services activity was a rare bright spot.
The Organisation for Economic Cooperation and Development believes Britain is already in a mild recession, and the country's independent forecasting body, the Office for Budget Responsibility, slashed its 2012 growth forecast to just 0.7 percent last week -- broadly in line with Bank forecasts.
Bank policymakers have played down prospects that they might change the ongoing QE programme, saying in minutes to November's decision that fine-tuning would not be helpful, and that it would be hard for the market to supply a much faster pace of gilt purchases.
Martin Weale, an external member of the nine-man Monetary Policy Committee which sets rates, said he would prefer to see inflation fall in line with forecast before doing more QE.
Inflation is currently 5 percent -- more than double the Bank's 2 percent target -- but the Bank predicts it will slide rapidly in 2012 and be below-target by the end of the year, due to economic weakness and a stabilisation in commodity prices.
Not all economists are happy with the Bank's wait-and-see stance, however, arguing that there was a case for the central bank to pre-announce future QE.
We have been surprised that the MPC has chosen to deactivate the meetings between Inflation Reports, said J.P. Morgan economist Malcolm Barr. To the extent that some of the stimulus from asset purchases occurs when the purchases are announced, rather than when the purchases actually take place, this would get more stimulus into the system sooner, he said.
(Reporting by David Milliken.)