Bank of England injects further £75bn into economy

 

The governor of the Bank of England, Mervyn King, tells the BBC that quantitative easing will have an effect

The Bank of England has said it will inject a further £75bn into the economy through quantitative easing (QE).

The Bank has already pumped £200bn into the economy by buying assets such as government bonds, in an attempt to boost lending by commercial banks.

But this is the first time it has added to its QE programme since 2009. There have been recent calls for it to step in again to aid the fragile recovery.

The Bank also held interest rates at the record low of 0.5%.

On Wednesday, data showed the UK economy grew by 0.1% between April and June, which was less than previously thought.

"In the United Kingdom, 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 Bank said in a statement.

"The deterioration in the outlook has made it more likely that inflation will undershoot the 2% target in the medium term.

"In the light of that shift in the balance of risks, and in order to keep inflation on track to meet the target over the medium term, the committee judged that it was necessary to inject further monetary stimulus into the economy."

Sterling fell by almost two cents after the announcement to $1.5280, its lowest since late July 2010.

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The CBI and the British Chambers of Commerce (BCC) business groups welcomed the Bank's move to expand the QE programme to £275bn, but said that on its own, its impact would be limited.

"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," said Ian McCafferty, the CBI's chief economic adviser.

"Only once the turmoil in the eurozone is resolved will confidence be fully restored."

David Kern, chief economist at the BCC, said: "Higher QE on its own is not enough and we urge the MPC [Monetary Policy Committee] to look at other radical methods.

"There is a strong case for the MPC to help boost bank lending to businesses by immediately raising its purchases of private sector assets."

The manufacturers' organisation, the EEF, said that the Bank's decision to act now, before the third-quarter estimates of GDP and its latest inflation forecast were released, "would indicate that members believed immediate action was warranted in order to head off a deteriorating growth outlook".

However, the National Association of Pension Funds (NAPF) is calling for an urgent meeting with the pensions regulator to discuss ways of protecting UK pension funds from the negative effects of QE.

QE tends to push down long-term bond yields, therefore reducing the return on the investments made by pension schemes.

"Quantitative easing makes it more expensive for employers to provide pensions and will weaken the funding of schemes as their deficits increase," said Joanne Segars, chief executive of the NAPF.

"All this will put additional pressure on employers at a time when they are facing a bleak economic situation."

Complementary actions

Start Quote

If you're not sure of the quality of your ammunition, it's best to fire first. Some will see that as the explanation for the slightly early launch of QE2 from the Bank of England today”

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The governor of the Bank of England, Mervyn King, wrote to the chancellor earlier on Thursday, setting out the MPC's case for expanding the asset purchasing programme.

In his letter of response, in which he authorised the move, Chancellor George Osborne said: "I agree that an increase in the ceiling would provide the MPC with scope to vary the stance of monetary policy to meet the inflation target."

In his speech to the Conservative Party conference earlier in the week, Mr Osborne said that the Treasury would look into "credit easing" - a way to underwrite loans to small businesses who are struggling to get credit now.

He confirmed this in his letter to Mr King: "Given evidence of continued impairment in the flow of credit to some parts of the real economy, notably small and medium-sized businesses, the Treasury is exploring further policy actions. Such interventions should complement the MPC's asset purchases."

 

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  • rate this
    +46

    Comment number 564.

    Split it per head of population - get it properly back in to the system through consumers rather than in the pockets of greedy banks who will only use it for their own gain. It's what we all deserve for bailing out the risk-taking gamblers in the first place!

  • rate this
    +111

    Comment number 179.

    So the big idea is to give even more money to the banks. Then what? Sit with fingers crossed that this will get the economy moving? Think not. Money to the banks will just add to there funds. Government has said banks must build up their funds. Just give the money to the people to spend. £75 billion divided between us and we will spend our way out of the crisis. Thats growth.

  • rate this
    +38

    Comment number 144.

    This stupid move is just feeding a bigger crash. It just delays the inevitable.

    They can't stop the impending crash, only delay it.

    The best thing people can do is to try to pay down their debts. Don't spend unless you have to. (not easy i know, but please don't waste your money on frivolities if you have any to spare)

    Those in power are making it worse by delaying it. We need to force it.

  • rate this
    +161

    Comment number 142.

    I don't understand why we continue to feed money into a banking system which then uses the money to shore up its own bank balance, pay itself lavish bonuses & refuses to issue loans.

    Surely we should just give the money to taxpayers who would either use the windfall to purchase goods or repay debts, in turn the money would filter through to where it’s needed, businesses & HMRC.

  • rate this
    +114

    Comment number 10.

    Another 75Bn straws to clutch at. It's just delaying the inevitable final crash of the Uk economy. Lets just bin the existing banks and start again with ones designed to serve the country and not themselves.

 

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