The Bank of England may flag the need for yet another cash injection to shore up the economy when it updates growth and inflation forecasts later on Wednesday, as the euro zone debt crisis threatens to tip Britain back into recession.
The central bank restarted its asset purchase programme in October with a 75 billion pound cash boost, and policymakers had considered pumping in even more due to the gloomy outlook for the economy.
Many analysts reckon the Bank will use Wednesday's inflation report to signal that more quantitative easing may be needed, as it looks set to predict a somewhat sharper slowdown in inflation and much softer growth than in August.
Bank Governor Mervyn King is also likely to sound a downbeat tone on prospects for the economy in his news conference from 10:30 a.m., reinforcing expectations the central bank will raise its QE target from the current 275 billion pounds before too long.
In a letter to Chancellor George Osborne on Tuesday, King said the uncertainty about the prospects for the global economy, and the euro zone in particular, had increased in recent months, weighing on the outlook for Britain.
Deutsche Bank economist George Buckley reckons the central bank will inject an additional 50 billion pounds of stimulus in February -- in line with most other economists in a recent Reuters poll.
The risks of a recession have increased. I don't know whether King will say the R word, but he'll certainly say the risks of a significant downturn have increased, Buckley said.
Bank policymakers Paul Fisher and Martin Weale have already warned about the risk of a contraction in the final quarter of 2011.
The Bank resumed its QE programme even though inflation was running at more than double its 2 percent target, citing the substantial risks of a growth slowdown from the euro zone sovereign debt crisis. It is likely to use softer growth and inflation forecasts to justify that decision.
Inflation eased to 5 percent in October and King said in an explanatory letter to the government on Tuesday that he expected it to fall sharply in the next six months and return to around target by the end of 2012 as one-off effects from this year's VAT rise fall out of the data.
No doubt this will again be one of the lines of defence the governor peddles in his press conference if asked about sanctioning further QE, said Victoria Cadman, economist at Investec.
In its August forecasts, the Bank said it expected inflation to fall to just over 2 percent by the end of 2012 and to 1.7 percent by the end of 2013. Analysts said those projections were likely to have been revised down, albeit only slightly.
Given a slew of dire economic news since August's inflation report and with no resolution to the euro zone crisis in sight, the central bank will probably have to chop its growth forecasts for the next two years.
Economists in a Reuters poll reckon the Bank will downgrade its forecasts for growth to 1.5 percent at the end of 2012 and 2.2 percent by end-2013, well below the 2.2 and 2.9 percent it pencilled in three months ago.
Given the weak outlook, the central bank is also likely to signal it will leave interest rates at their record low 0.5 percent until at least 2013.
(Reporting by Fiona Shaikh; Editing by John Stonestreet)