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Sterling tumbled today after the Bank of England pledged to pump another £50 billion into the economy to shore up signs of a fragile recovery.
The Bank extended its programme of quantitative easing from £125 billion to £175 billion with a warning that lending to businesses remains weak.
It also left interest rates on hold at 0.5% while the European Central Bank kept rates on the continent at 1%.
Stephen Boyle, head of economics at Royal Bank of Scotland, said: “This tells us that the Bank believes the UK economy remains in intensive care and that a bigger defibrillator is needed to help it emerge from the worst downturn for a generation.”
The pound dropped like a stone after the announcement, falling from around $1.70 against the US dollar to $1.6805 and from above €1.182 against the euro to €1.171.
Gilt futures soared, driving down long-term interest rates.
Many in the City thought the Bank would pause for breath having already spent £125 billion buying up assets since March.
It is not yet clear if the process is working and the decision to print another £50 billion over the next three months shows how concerned the Bank is over the economy.
In a letter to Chancellor Alistair Darling, Bank Governor Mervyn King said: “In the UK, the recession appears to have been deeper than previously thought. GDP fell further in the second quarter of 2009. But the pace of contraction has moderated and business surveys suggest that the trough in output is close at hand.
“Money growth has picked up since the end of last year but remains weak. And though there are signs that credit conditions have started to ease, lending to business has fallen and spreads on bank loans remain elevated.”
The decision was welcomed by many analysts and commentators.
Hetal Mehta, senior economic advisor to the Ernst & Young Item Club, said it was “just what the doctor ordered”.
She said: “Although we have had a raft of positive survey data, meagre growth in lending and news that the economy is shrinking faster than anticipated warranted this move. The risk of a relapse will remain until strong monetary growth resumes.”
The Governor of the Bank of England's letter to the Chancellor
The Chancellor's response to the Governor
Reader views (8)
50 billion straight into the bonus pool for bankers and all the other fatcat chairman who who run ftse companies. just give them the money as that's all that counts in this country. the worst recession since the 30's, not for the rich, they've never made so much.
- Michael, london, 06/08/2009 20:04
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The fundamental facts are that the Banking System is hiding massive losses which effectively render it insolvent, and the government is so far in debt (and borrowing more each day) that there is no conceivable way for this debt to be paid off.
There will always be blips in any decline or, at least, second derivative "Rate of decline is slowing" periods. Human nature being what it is, people latch onto these datapoints to fool themselves that things will be back to normal soon. The problem is that it's the last decade of borrow-and-spend that was abnormal. A decade of profligacy and misallocation of resources will not be fixed in a few months.
We have been given a brief window of opportunity during this collective delusion of green-shoots to divest ourselves of any assets likely to be impaired by the inevitable resumption of economic decline. Buy Gold before it rockets.
- Corbo, Norwich England, 06/08/2009 17:36
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Goldman Sacks of Cash,Barclays and HSBC profits in a time of recession...Now how could that be.?...Well it seems that the technology of microsecond dealing along with microselling and microbuying is the answer...Superfast computing, networking and High Frequency Trading is the new game in town and if you are ahead of the game you can make lots of money by controlling the market.
Basically it is cheating...Heads I win, tails you lose....Just as casinos never loose.
So the best bet is if you are in with the in crowd, you are a winner. But if you are not part of this new technological game, stay well away from the stock market otherwise you could loose lots...Wait and see the next crash.
The fear now is that the pension schemes will be slow to react and could continue loosing out and also the large bailed out banks and building societies will no longer be part of the in crowd and they will also loose out, resulting in massive public support from the tax payer...Question is how much more cash/ financial support can the government provide to prop up the loosers?...By then I fear that there will be a massive flight of capital from the UK by the "in crowd".
- Ian, Inverurie, Aberdeenshire., 06/08/2009 17:00
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I would just like to thank the Government and the Bank of England for blowing the recovery that the pound has made against the Euro in just about as long as it takes for the Prime Minister to blow his nose! Do any of these people realise that the need to have a strong currency if they are to remain in Europe - come to that the British governmeent needs to be strong too - something that they are proving is not so the longer they "occupy" number 10.
- John, St Jean La Poterie, France, 06/08/2009 16:31
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For obvious reasons the 'expat" community in Europe can only read or follow this news with utter dismay and horror. We recently read that there was hope and anticipation in the UK economy and, as a result, we were delighted to see that the Pound had risen against the Euro. But enters on the stage in the persons of the Governor of the Band of England and the Chancellor of the Exchequer and we all lose quite substantially on the exchange. I dread to think what the tax hike will be in the future and it seems a long way to the general election:as if that would change anything. I hope one day the UK will join the single currency.
- Arthur Lincoln, Roeselare, Belguim, 06/08/2009 16:26
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The "green shoots" that are appearing are terribly frail and I suspect the BoE feels that there is still a strong risk of recession deepening. Investment will continue to be weak all the while the tax regime discourages such action. The Government is still hooked on the same dilemma it has had from the beginning. It needs to reduce tax and spend revenues, a contradictory position that can only be resolved in the end by using reserves - and of course we have none. Prepare for a longer harder road yet.
- James Elliott, Eastbourne UK, 06/08/2009 15:22
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Where are the sound-money economists when you need them? It is absolutely obvious that this is the road to ruin. You need Keynesism going into a recession - sure. But you need monetarism coming out to prevent the whole thing turning into an inflationary vortex. When do you switch? The $64,000 question (or £150 billion question in the case of QE) but it is surely when the green shoorts are coming back. THEY ARE COMING BACK - that's unless you screw it up with an inflation/interest rate spike. The only reason not to follow this is if you actually want inflation - now who could that be (perhaps a government wanting to erode its debt)?
- Jimbob, London, E1, 06/08/2009 14:20
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Being a layman; could someone tell me where this £50 billion is being pumped?
- Mickinlondon, london., 06/08/2009 13:28
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