• ECB to boost liquidity with €40bn bond buy-up
• Osborne poised to give credit to private firms
SIR Mervyn King, the Bank of England governor, stunned markets by turning Britain’s electronic printing presses back on yesterday, as he announced a second round of quantitative easing (QE) worth £75bn.
Sir Mervyn said last night: “This is the most serious financial crisis at least since the 1930s, if not ever...The world has changed,” as he launched the latest round of stimulus.
An extra £75bn of assets will be purchased with newly created money over the next four months, starting with £1.7bn on Monday. The Bank will buy gilts with residual maturities of over three years.
Loosening monetary policy is necessary because “the impact of the rest of the world on the UK does threaten our recovery”, Sir Mervyn said. “We have taken pre-emptive action to try to prevent the slowdown from becoming too serious.”
He particularly pointed to the weak Eurozone economy as a factor dragging down UK growth.
The Bank’s monetary policy committee has conceded that inflation is too high, but adopted the inflationary policy nonetheless as it believes prices are increasing due to “temporary” factors such as the “increase in VAT in January and the impact of higher energy and import prices”.
Sterling fell sharply on the announcement, worrying some analysts. “With no obvious shortage of money in the economy, ‘excess’ liquidity created by QE2 should support asset prices and push down the exchange rate,” said Henderson’s Simon Ward. “A lower exchange rate would damage growth prospects by boosting import prices and sustaining a high-inflation squeeze on hard-pressed consumers.”
However, chancellor George Osborne agreed with the MPC that further QE would help to keep inflation on target in the medium term. “The evidence shows that QE will help keep interest rates down and boost demand and that will be a help for British families,” he said.
Osborne said he was exploring “further policy options” to improve the “flow of credit to some parts of the real economy”, in reference to the so-called “credit easing” scheme announced at the Conservative party conference earlier this week.
City A.M. understands the Treasury is drawing up plans to extend the scheme from small and medium-sized enterprises to larger firms and even banks. It will sell tens of billions of pounds worth of new gilts and use the proceeds to buy commercial paper.
As yields are already far lower than in March 2009 when QE was first launched, economists warned that very large amounts of asset purchases may be needed to have a significant impact. Citi’s Michael Saunders put the figure at £500bn.
The MPC also voted to hold interest rates at 0.5 per cent for the 31st consecutive month.
Central banks throughout the West appear poised for a period of stimulus. The European Central Bank yesterday announced a new covered-bond purchase programme that will see it loan €40bn (£34.5bn) over the next year from November. Eurozone interest rates were held steady despite inflationary pressures.
Extra liquidity should help troubled Eurozone banks pay their bills – such as Dexia, which passed the stress tests earlier this year but has had to be propped up by the French and Belgian governments because it has lost investors’ confidence.
Across the pond, the doves on Ben Bernanke’s Federal Reserve appear to be in the ascendancy, despite opposition to more stimulus from three hawks. “We believe that the Fed will also launch QE3 within the next six months,” commented Ignis Asset Management’s chief economist Stuart Thomson yesterday.