The UK's stagnant economy is poised to receive a much-needed boost as the government is expected to embark on fresh monetary stimulus in the coming months.
Further stresses in the financial system and mounting evidence of weakening global growth increased the likelihood of a second programme of asset purchases, Goldman Sachs said in a report released this month. The Bank of England's monetary policy committee has already bought £200 billion of assets already under its first quantitative easing (QE) programme. The move involved buying government gilts.
"With gilt yields now lower than they were under QE1, the impact under QE2 is likely to be smaller. But it is still likely to be substantial," the Goldman economists Kevin Daly and Adrian Paul wrote in the report.
Economic growth has remained sluggish since the government began pushing through a £111bn austerity drive in a bid to cut the country's budget deficit.
Fresh signs of gloom emerged last week as data showed manufacturing slipped to a 26-month low and house prices dropped.
GDP growth forecasts for the UK were lowered for this year from 1.5 per cent to 1.4 per cent, the bank said.
Goldman also lowered its growth expectation for next year from 2.5 per cent to 2.3 per cent.
It shifted back its forecast for the first interest rate increase from the last quarter of next year until 2013.
Indications that the policy committee might be more willing to consider new asset purchases emerged at its meeting last month.
Some members of the committee said asset purchases might be necessary if "downside risks" increased, the minutes showed.