Bank of England to inject £75 billion into UK economy

The Bank of England has voted to inject an extra £75 billion into the slowing UK economy by increasing the amount of quantitative easing to a total of £275 billion because ‘global expansion has slackened’.

The Bank of England has voted to inject an extra £75 billion into the slowing UK economy by increasing the amount of quantitative easing (QE) to a total of £275 billion because ‘global expansion has slackened’.

As the bank’s Monetary Policy Committee today agreed to maintain the official interest rate 0.5 per cent, members voted to increase the size of its asset purchase programme, which is financed by the issuance of central bank reserves. It is the first time the bank has added to its QE programme since 2009.

In a statement, the committee says, ‘The pace of global expansion has slackened, especially in the United Kingdom’s main export markets. Vulnerabilities associated with the indebtedness of some Euro-area sovereigns and banks have resulted in severe strains in bank funding markets and financial markets more generally. These tensions in the world economy threaten the UK recovery.’

It continues, ‘In the UK, the path of output has been affected by a number of temporary factors, but the available indicators suggest that the underlying rate of growth has also moderated. The squeeze on households’ real incomes and the fiscal consolidation are likely to continue to weigh on domestic spending, while the strains in bank funding markets may also inhibit the availability of credit to consumers and businesses.

‘While the stimulatory monetary stance and the present level of sterling should help to support demand, the weaker outlook for, and the increased downside risks to, output growth mean that the margin of slack in the economy is likely to be greater and more persistent than previously expected.’

While inflation, which currently stands at 4.5 per cent, is set to ‘undershoot’ the 2 per cent target in the medium term, the committee says, it was judged that ‘it was necessary to inject further monetary stimulus into the economy’. The new programme of asset purchases will take four months to complete.

Business industry groups and investors have generally welcomed the move, which had been expected but at a lesser amount. Jeremy Batstone-Carr, chief economist at Charles Stanley, comments, ‘The increased scale of the programme is a direct reflection of the deterioration in the UK economy.’

He adds, ‘It also reflects the bank’s view that a large amount of QE is required to make a difference to both the real and nominal GDP growth, given the impaired nature of the banking system.’

The CBI and the British Chambers of Commerce both agreed extra QE was needed to return the economy to growth, but its impact would be limited and dependent on the reform of sovereign political and economic systems.

Ian McCafferty, the CBI's chief economic adviser, comments, ‘This measure will help support confidence, but we need to recognise that its impact on near term growth prospects is likely to be relatively modest. Only once the turmoil in the Eurozone is resolved will confidence be fully restored.’

David Kern, chief economist at the BCC, adds, ‘Higher QE on its own is not enough and we urge the MPC to look at other radical methods.’