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WE'RE NOT OUT OF THE WOODS YET

THE City was bitterly divided last night over the wisdom of the Bank of England decision to extend its quantitative easing (QE) policy by a further &pound;25bn to an eye-watering &pound;200bn.<br /><br />But commentators were united in interpreting the Monetary Policy Committee&rsquo;s (MPC) extension to QE&nbsp; as a clear sign it believed the economy is not out of the woods yet.<br /><br />It came as the National Institute for Economic and Social Research (NIESR) forecast the UK economy shrank by 0.6 per cent last month, fuelling fears that Britain will not return to growth in the fourth quarter of the year, contrary to what most economists have been expecting. <br /><br />The NIESR said: &ldquo;The profile of the economy suggests that the current depression is probably slightly worse than the experience of the early 1980s but not as bad as that of the early 1930s.&rdquo; Shockingly, it added that the UK&rsquo;s gross domestic product was now barely above the level seen in 2003.<br /><br />Most economists cautiously welcomed the extra QE, arguing it would provide an extra degree of support for businesses and confidence as well as prevent unwanted tightening in financial conditions. <br /><br />But Henderson&rsquo;s Simon Ward&nbsp; called the decision a &ldquo;damp squib&rdquo; and argued that an additional &pound;25bn of buying over three months will have minimal effects relative to a policy of suspending purchases now.<br /><br />And Liberal Democrat shadow chancellor Vince Cable said: &ldquo;There is now a danger that we are simply throwing more and more money at a problem with little evidence that it is having any positive impact beyond the financial sector.&rdquo;<br /><br />With net lending to businesses and households still at low levels and the UK lingering in recession, other economists questioned the effectiveness of QE in its form of&nbsp; buying mainly gilts.<br /><br />Erik Britton, director at Fathom Financial Consulting, said: &ldquo;Simply buying gilts will continue to have little impact on the real economy for cash-strapped businesses and households alike. Instead, we favour the redirection of QE towards real assets, in particular housing, and even equity in banks and other recovery-critical institutions&rdquo;. He added: &ldquo;The economy needs further support, and QE is the only lever that is still available to policy makers. Ideally it would not just be more QE, but also better QE.&rdquo;