THE Bank of England&rsquo;s Monetary Policy Committee (MPC) shocked the markets yesterday with an unexpected increase of its quantitative easing programme to &pound;175bn, equivalent to 12 per cent of GDP and above the maximum authorised by chancellor Alistair Darling in March.<br /><br />Sterling fell more than a cent against the dollar after it hit nine-month highs earlier this week, while gilt futures soared after the decision, which also kept interest rates on hold at 0.5 per cent. <br /><br />The market had been split over whether the MPC would extend QE, but few economists thought that it would go beyond &pound;150bn this month. But the bank said it had taken the decision in light of poor money supply data and to ensure the UK&rsquo;s fragile recovery. <br /><br />Following the decision, the Bank&rsquo;s governor Mervyn King wrote to the chancellor requesting the upper limit to be raised to &pound;175bn. The Bank said that the UK&rsquo;s recession appears to have been deeper than thought and that while recent data suggested that a recovery in output was near credit conditions remained tight.<br /><br />While the Bank admitted that there was a &ldquo;considerable stimulus&rdquo; working through the economy, it was balanced against a very large negative output gap and the need for further deleveraging. <br /><br />The chancellor agreed that an increase in the ceiling would provide the MPC with scope to vary the stance of monetary policy to meet the inflation target.<br /><br />David Kern, chief economist at the British Chambers of Commerce, said: &ldquo;We welcome the decision to increase the QE programme to &pound;175bn. This should be sufficient for the time being, but more may be needed later in the year.&rdquo;<br /><br />Philip Shaw, UK economist at Investec, said: &ldquo;Were the MPC to wish to lift QE further still, it would need to request further headroom from the Chancellor.&rdquo;<br /><br />While the degree of spare capacity in the economy at the moment suggests the impact of inflation will be benign, Philip Hammond, the Conservatives&rsquo; shadow chief secretary to the Treasury, said it was still a concern<br /><br />&ldquo;Every extension of the QE programme also adds to the longer-term risk of fuelling inflation when the economy recovers,&rdquo; he added.<br />