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The Bank of England today defended the shock decision not to extend its programme for printing money this month amid fresh signs the UK economy remains deep in the mire.
Threadneedle Street stunned financial markets two weeks ago when it decided to leave the amount of money it plans to pump into the economy through buying gilts and corporate bonds at £125 billion.
The City had expected the monetary policy committee, chaired by the Bank's Governor, Mervyn King, to raise the quantitative easing target to the £150 billion limit set by Chancellor Alistair Darling to stimulate economic growth and prevent a bout of dangerously low inflation.
But MPC minutes published today said: “There had not been enough clear evidence to suggest that the £125 billion target should be changed,” a stance which was supported unanimously by the committee, showing just how wrong City forecasts were. The decision to leave interest rates at 0.5% was also unanimous.
The Bank left the door open to expand the programme in future, possibly as early as next month when it publishes its latest quarterly report on the state of the economy.
It said the August inflation report “offered an opportunity to reassess the stock of asset purchases in the light of a fully updated assessment of the outlook for inflation and growth at its next meeting”.
City economists were split over what the Bank will do next, with some arguing “that is it” for quantitative easing.
It came as the CBI warned that manufacturing faces a long, hard slog out of the steepest recession since the Second World War.
A gloomy report by the National Institute of Economic and Social Research think tank also warned that the UK faced years of pain.
It said the slump in the UK housing market will last until 2012 and unemployment will keep rising until it hits three million in mid-2011. The jobless total is currently 2.38 million.
The institute forecast the economy would shrink by 4.3% this year before growing by a modest 1% next year and 1.8% in 2011 - far weaker than the Government's “optimistic” outlook.
Sterling fell 0.33 cents to $1.6426 and 0.05 cent to �1.1562 as traders digested the bleak outlook and concerns over rising government debts.
Figures on Friday are likely to show that gross domestic product fell again in the second quarter of this year having slumped 2.4% in the first quarter — the worst performance since the General Strike of 1926.
The institute forecast a decline in the second quarter of 0.4% followed by contraction of 0.1% in the third quarter.
It pencilled in growth of 0.5% in the final quarter of the year but warned there will be no return to strong growth until 2013.
The scale of recession means further deterioration of the already battered public finances.
The think-tank said borrowing - due to peak at a record £175 billion this year on Treasury estimates - could still be running at £160 billion in 2013-14.
That is £63 billion or 65% more than the £97 billion outlined by the Chancellor in the Budget.
Reader views (1)
To understand the banking system, you must acquaint yourself with Fractional Reserve Lending and the scam becomes clearer. Banking is a giant fraud against the people.
- Neil, London, London UK, 22/07/2009 17:04
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