UK Inflation Slows to Near Three Year Low 2.8% in May - ONS

UK inflation fell to 2.8 percent in May, according to the Office for National Statistics (ONS), giving Bank of England policymakers more room to move on their quantitative easing programme as Britain's dismal economy struggles through recession.

It is the lowest rate since November 2009 and is down from April's 3 percent, but remains a way off the government's 2 percent target that the Bank expects to meet by the end of 2013.

"This may be welcomed by recession-hit consumers but it is unlikely to translate into increased spending, since UK wages are shrinking at a similar pace," Richard Driver, analyst for Caxton FX, said.

The largest downward pressures "came from motor fuels, food and non-alcoholic beverages," said the ONS.

"The largest upward pressures ... came from air and sea transport, where the timing of Easter had a significant impact on the April to May movement."

It is the first May decline since 1996.

More Bank of England QE?

All eyes are on the Bank to help grow the economy, given the government's strict insistence on fiscal austerity, and there is a sense of urgency for it to do more since Britain plunged back into its second recession in four years at the start of 2012.

Many economists expect another £50bn of quantitative easing from the Bank, which has slashed its growth forecasts by a third for the UK, to just 0.8 percent for the year.

The Bank wrapped up its quantitative easing programme when it met its £325bn target in May, amid fears that more stimulus could push up inflation, which was proving sticky and saw a surprise rise in March.

Known as the asset purchase facility, the programme saw the Bank print cash to buy up high quality assets, such as gilts, in order to improve liquidity.

It was hoped that businesses would use this money, freed up from assets, to invest in expansion and jobs and get the British economy moving again.

However a recent Ernst & Young report revealed that big business is hoarding the cash rather than spending, defeating the object of the stimulus.

'Funding for Lending' and ECTR

The Bank recently announced billions of pounds worth of new measures to get banks once again lending to businesses and consumers, who they and the Treasury think desperately want access to credit.

Speaking at the annual Mansion House dinner with City of London financiers, Sir Mervyn King outlined two schemes.

The first, called the Extended Collateral Term Repo, sees a minimum of £5bn made available to banks each month in the form of six month loans at low interest rates.

This readily-available cash is meant to reassure banks that are fearfully sitting on more capital than they need to in case of another crisis, in the hope that they start lending more again.

The Bank's second scheme is called "Funding for Lending" and will see around £80bn of Treasury bills, rather than cash, used to shore up banks' lending risks.

These bills will have a three or four year maturity date and, because the risk is absorbed by the Bank, should free up credit.

Access to funds would be "linked to the performance of banks in sustaining or expanding their lending to the UK non-financial sector during the present period of heightened uncertainty," King said in his speech.

"It could, I hope, be in place within a few weeks," he added.

SMEs and access to credit

Some doubts have been raised over the effectiveness of these new schemes, with research suggesting there is not a need or desire for credit from small and medium sized enterprises (SME).

Only around half are actively seeking finance, while the rest experience a good success rate in lending approvals.

"Most SMEs that applied for finance were successful, with overdraft success rates remaining higher than for loans," according to the latest research into SME finance by BDRC Continental, the UK's largest independent research consultancy.

BDRC's report shows that 79 percent of applicants for new or renewed overdraft facilities were successful, while 59 percent of loan applications were also given the green light.

Across the year 90 percent of renewal applications for existing credit facilities were approved by lenders, with 59 percent seeing success in applications for new or increased lending.

Furthermore 60 percent of SMEs say they are "happy non-seekers" of new finance for the next three months.