Bank of England ups quantitative easing by 75 billion pounds

By Anna Tomforde Oct 6, 2011, 14:06 GMT

London - The Bank of England on Thursday increased the size of its asset purchase programme in an attempt to boost flagging economic growth amid fears of a double-dip recession and the repercussions on Britain of the eurozone crisis.

The bank's ruling Monetary Policy Committee (MPC) decided to inject a further 75 billion pounds (116 billion dollars) into the economy, raising the total level of so-called quantitative easing (QE) to 275 billion pounds.

The earlier-than-expected move to revive QE for the first time since November 2009 came after a sequence of disappointing growth figures as critics urged the Conservative-Liberal government to flank its strict deficit reduction programme with measures to boost growth.

Under the QE mechanism, the central banks pumps money into the system to increase spending, mainly through buying government bonds.

The government had come under increasing pressure to take stimulus measures to boost the economy, as inflation remains high at 4.5 per cent - more than twice as high as the government's own upper target of 2 per cent - and interest rates are at a record low.

The Bank of England left interest rates unchanged Thursday at their historic low of 0.5 per cent, the level to which rates were cut in March 2009 in response to the global banking and financial crisis.

George Osborne, the Chancellor of the Exchequer, welcomed the BoE decision as a 'positive move' that would boost demand while keeping interest rates low and allowing the government to continue with its 'credible plan to deal with debt.'

However, critics said that injecting more cash into the economy was likely to fuel inflation and would not - on its own - encourage spending and growth.

Revised figures published this week showed that the British economy came to a virtual standstill in the second quarter of this year, with growth at just 0.1 per cent between April and June.

Chris Williamson, chief economist at financial services information firm Markit, said the bank's move was proof that it was sufficiently worried about the 'risks of slipping back into recession.'

The International Monetary Fund and other institutions have warned the British government that its programme of deficit reduction through massive public spending cuts should be accompanied by temporary tax cuts and other relief measures to encourage growth.

But the government argues that it is leading the way internationally on deficit reduction and that any deviation from its policy would harm its fiscal credibility and threaten its triple-A credit rating.

The Bank of England said it boosted QE because 'tensions in the world economy' threatened the British recovery as the 'slack in the economy is likely to be 'greater and more persistent than previously expected.'

In addition, the crisis in the eurozone had put a severe strain on bank funding markets and financial markets more generally, said the Bank of England.

Ian McCafferty, the chief adviser of the Confederation of British Industry, welcomed the central bank's move but said the measures would only have a modest impact as long as the 'turmoil' in the eurozone was not resolved and confidence fully restored.