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Slow recovery and limited credit behind QE extension

A SLOW economic recovery and the likelihood that credit will remain limited as banks repair their balance sheets were behind the Bank of England&rsquo;s decision to extend quantitative easing (QE) by &pound;25bn yesterday.<br /><br />The Bank said stimulus measures were still working their way through the economy from the substantial easing in monetary and fiscal policy. <br /><br />But it judged that the loss in potential output as a result of the recession would mean &ldquo;a substantial margin of under-utilised resources persists, which will continue to bear down on inflation for some time to come&rdquo;. But this will be offset in the short run by the impact of the past depreciation of sterling, which indicates that the&nbsp; Monetary Policy Committee (MPC) has probably again raised its near-term inflation forecast.<br /><br />But only &pound;25bn will be pumped into the economy over the next three months, which indicates that the Bank will be conducting its asset purchases at half the previous rate. <br /><br />But there was no real guidance in the Banks comments as to what prompted the MPC to extend QE by &pound;25bn, said Citi&rsquo;s Michael Saunders. <br /><br />He added: &ldquo;The MPC just cites its inflation forecast, but has never really identified how it believes any given amount of QE affects prospects for growth and inflation.&rdquo;