Bank expands 'money printing' scheme by £50bn
The Bank of England stepped up its aggressive campaign to end Britain’s economic slump today by ordering a surprise £50 billion expansion of its radical scheme to jump-start growth by “printing money”.
Much of the City was wrong-footed as the Bank announced that it will immediately increase the scale of its drive to pump extra cash through the economy by buying government and corporate bonds - IOUs from the Treasury and businesses.
The unexpected move will add to the Bank's purchases so far of £46 billion worth of government bonds, or gilts, and corporate debt using newly created money under the £75 billion first phase of its radical “quantitative easing” (QE) scheme. Today it said that it will now increase the total to be spent under the ground-breaking plan by £50 billion to £125 billion.
The Bank added that the measures will now run for a further three months, beyond the first phase that is due to finish at the end of this month, extending the unprecedented action until the end of August.
The noon verdict from the Bank’s Monetary Policy Committee (MPC) came as it also confirmed that official interest rates will remain at their existing 315-year record low of 0.5 per cent. The widely expected “no change” decision over Bank rate will leave borrowing costs pegged for a second month in a row, after six months of drastic cuts that began last October as the economic crisis escalated.
The MPC’s decision to increase the scale of its operation to print money and buy assets brought forward a move that had already been widely tipped by experts to come next month.
The expansion of “QE” will be widely welcomed by the financial markets and the City.
But the move sparked immediate anxieties that the Bank now expects the already savage slump in the economy to be even deeper and longer than it has already predicted. Mervyn King, the Bank’s Governor, is due to unveil the MPC’s latest forecasts of Britain’s prospects next week.
The Bank’s decision that further drastic action is needed will also reinforce doubts over Alistair Darling’s relatively optimistic Budget forecast that the economy will start to revive by the end of the year and then rebound strongly into renewed growth.
Hopes that an eventual recovery is starting to emerge and that the worst phase of the recession has passed have risen in recent weeks after a flurry of more positive news suggesting that the pace of decline is beginning to ease.
But persistent fears over the outlook mounted last month after grim official figures revealed that GDP plummeted in the first quarter, shrinking at a headlong 1.9 per cent rate that outstripped even the 1.6 per cent drop in the final quarter of last year and was the worst quarterly slump for three decades.
The MPC’s decision to take further measures to breathe life into the economy emphasises the continued great uncertainty, which was highlighted by the committee in its statement unveiling the extra £50 billion in asset purchases.
In a measured assessment, the Bank acknowledged what it said were "promising signs that the pace of decline has begun to moderate", both at home and abroad. However, it also emphasised that the world economy "remains in deep recession", with world output falling, and global trade dropping "precipitously". At the same time, it added that "the global banking system remains fragile despite significant further intervention by the authorities".
The Bank said that the economy was caught between two conflicting forces. On the one hand, the slump was being aggravated and debt-laden households, businesses and banks strived to bolster their finances, cutting spending and saving more.
But pulling in the other direction were far-reaching steps by central banks, including the Bank of England, and governments across the world to kick-start growth through lower interest rates, QE, and tax and spending measures. A further boost to activity was also coming from a "substantial" fall in the pound and past, steeps falls in the cost of commodities including food and oil.
The MPC said that the stimulus put in place by the Bank, the Government and other countries should "in due course lead to a recovery in economic growth ... but the timing and strength of recovery is highly uncertain".
Confidence that recovery will emerge will be buoyed by the Bank's own recognition of "promising signs" that the economy is recuperating.
The latest glimmers of hope emerged yesterday, with the sharpest monthly improvement in conditions for at least a decade among services businesses, from restaurants, cinemas and leisure centres to accountants and lawyers.
Consumer confidence has also revived from record lows over several months, according to the main surveys of sentiment, mortgage lending has risen from rock-bottom levels earlier this year and there have been hopeful signs that the housing market slump in also easing, helped by a revival in interest among bargain-hunting prospective buyers.
But despite these apparent “green shoots” economists warn that the economy is for now still continuing to contract sharply, and that any return to even the most anaemic growth will not be until the autumn at the earliest.
Analysts point to the severe drag on recovery prospects from soaring unemployment, which has now climbed above two million and is tipped to exceed three million by next year, as well as from a sharp squeeze on take-home pay, and the toll from the past plunge in house prices.
The Bank’s decision to increase the scale of its QE programme will also stoke pressure on it to amend other key aspects of the scheme following a series of criticisms from MPs, business leaders and the independent Times MPC panel of experts.
Critics have complained that the effectiveness of the MPC’s campaign to pump extra cash and credit into the economy through its purchases of financial assets is being hampered since the bulk of the cash it is spending has so far gone on buying government bonds, or “gilts”.
Only a tiny proportion has gone on purchases of corporate debt in the form of company bonds and commercial paper, despite the Chancellor having authorised purchases of these up to an eventual £50 billion total.
Influential economists claim that, with businesses still suffering from a savage squeeze on their access to finance to keep their operations running and to fund investment, the Bank needs to do more to eases strains in corporate credit by shifting the emphasis of its QE scheme.
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