London: The Bank of England launched a second round of quantitative easing to defend Britain's faltering economy against the euro zone debt crisis, pledging to buy 75 billion pounds of assets with new money in an early, dramatic move to stave off recession.
Thursday's decision by the Bank to expand its asset purchase program to a total of 275 billion pounds highlights the precarious state of Britain's economy as global growth slows, government spending cuts and tax hikes bite, and consumers face high inflation and slow wage rises.
In a letter to Chancellor George Osborne seeking approval for the move, the Bank governor Mervyn King said the global economic recovery was faltering and that the euro debt crisis had created severe strains on financial markets.
"These tensions in the world economy threaten the UK recovery," King wrote.
While inflation is still expected to rise above 5 percent over the next months, the recent deterioration of the outlook had made it more likely inflation would undershoot the 2 percent target over the medium term, the Bank said.
Economists in a poll had reckoned there was a 40 percent chance the central bank would restart its asset purchase program, or quantitative easing, this month, though most had only expected an injection of 50 billion pounds.
The move puts the Bank ahead of other central banks in responding to a darkening global economic outlook and renewed market turmoil. Sterling weakened to its lowest in more than a year against the dollar, and long-dated gilt yields tumbled to record lows as markets braced for the Bank's asset purchases.
"Once again the Bank has made use of its secret weapon -- shock and awe," said Alan Clarke, an economist at Scotia Capital. "Pretty much everyone expected QE to restart at some point -- but it was only a minority view that it would start this soon, or be in excess of 50 billion pounds. In doing so the Bank has achieved the most bang for its buck."
Markets are now keen to see if ECB head Jean-Claude Trichet drops any hint of upcoming rate cuts at his last media conference after holding rates steady at 1.5 percent earlier.
The Bank has kept interest rates on hold at a record-low 0.5 percent since March 2009, unlike the ECB which raised them twice this year. The UK central bank bought 200 billion pounds-worth of assets with new money from March 2009 to February 2010.
CREDIT EASING
The Bank's action was welcomed by the government and businesses, but the boost it will provide to the economy is far from certain.
Its policymakers have repeatedly emphasised over the past couple of weeks that quantitative easing would still work despite the fact that bond yields are already at record lows.
However, some economists say the bleak economic outlook and a lack of demand were keeping businesses from investing and consumers from spending and not the lack of cheap credit.
In a move to address some QE shortfalls, finance minister George Osborne Monday announced a scheme of credit easing to funnel lending directly to companies starved of credit by banks.
"Given evidence of continued impairment in the flow of credit to some parts of the economy, notably small and medium-sized businesses, the Treasury is exploring further policy options," Osborne said in a response to King's letter.
While businesses and economists in general applauded the idea, such a scheme would be more a medium-term help for small- and medium sized firms than a quick fix for the economy's woes.
Meagre growth in service sector output in July and a drop in new car sales in September published Thursday added to a recent string of weak economic data.
The opposition Labour Party's finance spokesman, Ed Balls, said that QE was unlikely to be a big help to an economy hit by government spending cuts.
"With confidence depressed, it's very hard for monetary policy to make a difference. It's like pushing on a string," he said in a BBC interview.
MORE TO COME?
A number of policymakers had flagged their readiness to join arch-dove Adam Posen and vote for more quantitative easing, after many saw the case for more easing strengthening at the September meeting.
"The fact that the MPC chose to act now on QE and to go for 75 billion pounds rather than 50 billion pounds reflects the fact that they believe an already difficult outlook for the economy has deteriorated amid mounting domestic and global headwinds," said IHS Global Insight economist Howard Archer.
"We suspect that QE will be extended further in the first quarter of 2012," he said.
Some economists expect the central bank to eventually expand the total of its purchases to as much as 500 billion pounds.
Britain's economy has basically flatlined over the past 12 months. With the government's hands tied by its pledge to erase a budget deficit of some 10 percent of GDP, pressure has been mounting on the bank over the last couple of months to do more to support the economy.
The Bank has kept interest rates at 0.5 percent for more than 2-1/2 years -- already its longest period of inaction since World War Two. The Bank had kept its stock of asset purchases unchanged since February 2010, when the economy was picking up after a deep recession.
But the momentum shifted over the summer from a bias to hike rates to more easing as equity markets slumped and the euro crisis triggered fears of bank collapses and a renewed recession.
Source: Financial Express
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