King leaves rates on hold and prints £50bn

Hugo Duncan
7 May 2009

The Bank of England today promised to pump an extra £50 billion into the economy to drag Britain out of recession.

It left interest rates unchanged at 0.5% but said it is extending its quantitative easing programme, a way of printing money, from £75 billion to £125 billion.

The Bank, led by Governor Mervyn King, warned the world remains in “deep recession” but said there are some “promising signs that the pace of decline has begun to moderate”.

Sterling gave up early gains against the dollar and the euro as traders reacted with surprise to the decision.

Many in the City expected the monetary policy committee to wait until next month before extending the quantitative easing programme.

Philip Shaw of Investec said: “We are a little taken aback by the decision. We had thought it more likely the MPC would sit and wait to assess the impact of the existing programme rather than expand it right away. Clearly committee members have been spooked by some poor backward-looking domestic and international economic data.”

The Bank has so far bought £52 billion of Government bonds and corporate debt since the initial £75 billion of quantitative easing was launched in March.

It said it will take another three months to complete the scheme, which could be extended as far as £150 billion under rules laid down by Chancellor Alistair Darling.

The decision to extend quantitative easing by £50 billion as opposed to the full £75 billion available suggested the MPC was split over what to do and was forced to compromise.

The Bank warned inflation will fall from the current level of 2.9% to below the 2% target this year as recession bites but said the actions it and the Government have taken will “lead to a recovery in economic growth” and bring inflation back towards target.

“The timing and strength of that recovery is highly uncertain,” it said.

“The global banking and financial system remains fragile despite further significant intervention by the authorities.”

ECB mulls following Bank's lead

The European Central Bank today cut interest rates amid signs it could start printing money — much in the same way the Bank of England has.

Rates in the 16-nation eurozone were cut for a fourth time this year from 1.25% to an all-time low of 1% as the Frankfurt-based central bank stepped up its fight against recession.

ECB president Jean-Claude Trichet was also set to unveil measures on how to get more money flowing including such unconventional measures as were used in the UK.

Financial markets on the continent are also keen to know whether today's cut in interest rates will be the last or whether more will follow as the recession hits jobs and businesses across Europe.