Britain set for more stimulus as inflation retreats

British annual inflation dropped in December by the biggest amount in more than two years, official data showed on Tuesday, heightening the prospect of more stimulus from the Bank of England. The Consumer Prices Index (CPI) slowed to a rate of 4.2 percent in December from 4.8 percent in November, the Office for National Statistics (ONS) said in a statement. The drop was equal to the decline in the annual rate between March and April 2009, when Britain was mired in recession. The British economy clawed its way out of the downturn in the third quarter of that year. The ONS added Tuesday that inflation was pushed lower last month by the falling cost of clothing, gas and petrol, with further downward pressures from heavy discounting by retailers in the run-up to Christmas. Economists said news of slowing inflation would ease pressure on cash-strapped consumers and help persuade the Bank of England to pump out more emergency cash into the weak British economy under quantitative easing. "We expect the Bank of England to deliver another £50 billion of QE in February with another £50 billion likely to follow in the second quarter," said Howard Archer at consultancy IHS Global Insight. The BoE's Monetary Policy Committee (MPC) last week voted to leave interest rates at a record low 0.50 percent and maintain the central bank's stimulus programme amid fears the eurozone debt crisis was harming Britain's fragile economy. The bank opted against changing its QE programme of £275 billion (323 billion euros, $432 billion), but the scheme remains under review. Under QE, central banks create new cash that is used to purchase assets such as government and corporate bonds in the hope of giving a boost to lending and economic growth. However, some economists say that QE stokes inflation. With inflation falling, economists say the time is right to add more stimulus. "Today's data indeed will provide some relief to MPC members who are in favour of more QE, as it suggests that inflation will come down sharply -- as they expect -- in the near term," said ABN Amro economist Joost Beaumont. "Moreover, the drop in core inflation signals that weak economic conditions dampen underlying price pressures." The Bank of England's main task is to use monetary policy as a tool to keep annual inflation close to a government-set target of 2.0 percent. The bank predicted in November that the annual inflation rate would fall gradually throughout 2012. Meanwhile fears are growing that the British economy is sinking back into recession, according to two highly regarded forecasting groups, as the recovery is paralysed by the eurozone sovereign debt crisis. Both the Ernst & Young ITEM Club and the Centre for Economics and Business Research believe that British gross domestic product (GDP) shrank in the final quarter of last year and will fall again in the first three months of 2012. The technical definition of a recession is two successive quarters of contracting economic output.