BoE set to pump £50bn into economy

THE BANK of England set the money press rolling again yesterday, saying it will pump another £50 billion (€59.5 billion) into the economy to bolster a fragile recovery and shield Britain from fallout from the unresolved euro zone debt crisis.

The bank’s decision to print more money to buy government bonds comes despite signs Britain may avoid slipping back into recession and fresh hopes that a deal for debt-ridden Greece will forestall euro zone turmoil.

“Some recent business surveys have painted a more positive picture and asset prices have risen,” Bank of England governor Mervyn King said in a letter to finance minister George Osborne, explaining the decision. “But the pace of expansion in the United Kingdom’s main export markets has also slowed and concerns remain about the indebtedness and competitiveness of some euro-area countries,” he added.

The cash boost was welcomed by the government, which has come under pressure again to loosen its austerity drive after the economy shrank at the end of 2011 and unemployment hit its highest level in more than 17 years.

Mr Osborne said the central bank’s loose monetary policy continued to play a “critical” role in supporting the economy as he continued his austerity programme, and remained the main tool to respond to changes in the outlook.

Other global central banks are taking action to boost their economies, too. The European Central Bank kept rates at a record low 1 per cent, and the US Federal Reserve is close to deciding whether to launch a third round of its own quantitative easing programmes.

Britain’s recovery from a deep slump during the 2008-2009 financial crisis has been weak so far, and the contraction of the economy in the final quarter of 2011 stoked fears of a renewed recession.

The central bank said inflation would have probably fallen below the target of 2 per cent over the medium term without further easing, as a significant amount of unused capacity in the economy and unemployment was bearing down on prices.

Inflation fell from the three-year peak of 5.2 per cent in September to 4.2 per cent in December, and policy makers have voiced confidence that it will dip below the BoE’s 2 per cent target later this year, as predicted in November.

The BoE said improving real incomes were set to support a gradual recovery this year, though tight credit conditions and the government’s austerity measures presented headwinds.

In addition to extending the asset purchases to a total of £325 billion, the central bank held its key interest rate at a record low 0.5 per cent.

Sterling rose to a session high against the US dollar while gilts – fixed-interest loan securities issued by the UK government – reversed gains after the BoE decision. Gilts dropped further after Greek politicians agreed on debt-cutting steps to secure aid and help the country avert an unruly debt default.

The British Chambers of Commerce said that more QE was welcome but that the bank should consider buying other assets than gilts. BCC chief economist David Kern also called for an aggressive deregulatory programme alongside a package of credit-easing measures or an SME bank to boost the economy. – (Reuters)