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The Bank of England is to pump another £25 billion into Britain's ailing economy, it said today, and warned that the nation is set to experience a sharp dose of inflation.
The decision to expand the controversial quantitative easing programme — £200 billion so far including today's amount— comes amid growing doubts that the strategy is working.
Some economists question whether QE, buying assets from banks in the hope that they will in turn increase lending, is the best use of the money.
Edward Menashy, chief economist of Charles Stanley, said: “Where QE has succeeded is that it has raised asset prices and allowed companies to raise funds in the capital markets. Where QE has yet to succeed is convincing banks to lend money to smaller business enterprises and private individuals.”
Former MPC member DeAnne Julius criticised QE: “You have to ask yourself if it is helping the real economy and not just the banks. I'm afraid the answer is that it is not.”
The Bank's monetary policy committee claims there are clear signs that the economy is recovering, appearing to shrug off recent GDP figures showing that the UK is still in recession. “A number of indicators of spending and confidence suggest that a pick-up in economic activity may soon be evident,” said the Bank's statement today.
This is the third time the Bank has upped QE since the original £75 billion deal was unveiled. It added £50 billion in May and another £50 billion in August. This could be the last time QE is increased.
Howard Archer at IHG Global Insight said: “It may be that the MPC are trying to gradually wean the economy off quantitative easing and are keen not to upset the markets by bringing it to an abrupt halt. This could have risked sending gilt yields up significantly, which the Bank of England would be keen to avoid.
“We suspect that this will be the final extension to the quantitative easing programme unless the economy suffers a major relapse in 2010.”
Interest rates were kept on hold at 0.5%. They are expected to stay this low until late in 2010, when action may be needed to control inflation. The European Central Bank also this afternoon kept its rate at 1%.
The Bank warned “inflation is likely to rise sharply above the 2% target in the near term” because of higher petrol prices and the reversal of last year's VAT cut. The MPC has lately been split on how much to spend on QE. Governor Mervyn King wanted a higher injection of cash into the economy in August, but was outvoted by the other eight members of the committee.
Ian McCafferty, CBI chief economic adviser, said: “The Bank has recognised that the economic situation is still very fragile, and we welcome its decision. Extending quantitative easing ought to provide an extra degree of support for business and consumer confidence.
“It will have been a finely balanced decision for the Bank, as the impact of QE is difficult to quantify. We do not know what the economy would have looked like without a QE policy, and we do not know how long it takes for its various effects to have their full impact.”
The pound jumped as the Bank's statement hit City dealing desks. It added 0.76 cents to $1.6633 against the dollar, and €0.37 to €1.1174.
In other economic news, new car sales recorded their biggest increase this year in October, helped by the scrappage scheme. The Society of Motor Manufacturers and Traders said 168,942 new cars were registered last month, up 31.6% compared with October 2008.
Reader views (8)
Just keep on pumping Guvnor !!
- Mr S.Port, London, 06/11/2009 00:06
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we are not sinking...we are not sinking......Oh cripes we are sinking........are we sinking...under the shed loads of paper money being printed.......Oh gosh I dont know....and neither does any one else know........all they are doing is a prop up job with paper money....I am wondering when the prop gets pulled.......
- Themanoftruth, United Kingdom, 05/11/2009 21:45
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It is blatantly obvious - except to the MPC - that they don't know what they are doing, if their overt aim is to get the banks to lend money through QE, without at least some serious coercion, if not law, from the Liebore Government to effect this.
However, some believe that there is a serious and worldwide co-ordinated effort to usher in a NWO financial system, and if so, then QE could well be part of the means to ensure this.
Either way, what the MPC is doing is not beneficial to the vast majority of the British public and has too much inherent risk for QE to be allowed to continue.
- Ralph, London, 05/11/2009 15:30
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'The Bank warned “inflation is likely to rise sharply above the 2% target in the near term” because of higher petrol prices and the reversal of last year's VAT cut'
Nothing to do with printing shed loads of money and devaluing the pound then. That's a relief.
- Chris, brighton, 05/11/2009 15:23
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Having carefully read this piece, I'm off for a late lunch of green shoots and humble pie.
- Ted, London, 05/11/2009 14:43
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We need a good dose of inflation, although it puts prices up it also increases the value of what you already have,your 3 year old car will be worth more than the 25% of what it originally cost you, new cars should become dearer to the point where they are virtually un-affordable, then the manufacturers will stop building un-ordered cars and we could return to where you have to wait 6 weeks for it, whereas now the new car you buy may have been parked up unsold since last winter. In 1976/7 due to the shortage of new cars Ford put up the price by 12.5% and everything was sold, Ok houses were going up as well, but people had to put down proper deposits on real mortgage's, not mickey mouse tricky self-assessment mortgage's where the deposit is funded by 5 credit cards, and then people started to save, at one point National Savings were giving 12.5% on no deposit, this was something to save for, now its spend,spend,spend, The availability of cheap credit,hopefully, is now passed, and those members of the public who are lucky enough to have a job should learn to be more frugal and save for their retirement as in a few years the only state pension will be means tested.
- Bin There, A car lot near you., 05/11/2009 14:32
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The Gov't would actually love inflation to inflate away their debt mountain though politicians would never admit to that. Hence a good time to take out a big mortgage if you can afford it as say £500k today will get a nice house but in a few years may not even fill your car up with petrol!!!!
- Steve, Havering, 05/11/2009 14:28
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So no new public works. No scrappage scheme for white goods. Nothing except money for the finance sector. Brown leading the world, except that the UK is the only country does..
- Davidke, ramsey isle of man, 05/11/2009 13:46
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