BANK SHOCKS WITH NEW 50bn BOOST
THE Bank of England’s Monetary Policy Committee (MPC) shocked the markets yesterday with an unexpected increase of its quantitative easing programme to £175bn, equivalent to 12 per cent of GDP and above the maximum authorised by chancellor Alistair Darling in March.
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.
The market had been split over whether the MPC would extend QE, but few economists thought that it would go beyond £150bn this month. But the bank said it had taken the decision in light of poor money supply data and to ensure the UK’s fragile recovery.
Following the decision, the Bank’s governor Mervyn King wrote to the chancellor requesting the upper limit to be raised to £175bn. The Bank said that the UK’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.
While the Bank admitted that there was a “considerable stimulus” working through the economy, it was balanced against a very large negative output gap and the need for further deleveraging.
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.
David Kern, chief economist at the British Chambers of Commerce, said: “We welcome the decision to increase the QE programme to £175bn. This should be sufficient for the time being, but more may be needed later in the year.”
Philip Shaw, UK economist at Investec, said: “Were the MPC to wish to lift QE further still, it would need to request further headroom from the Chancellor.”
While the degree of spare capacity in the economy at the moment suggests the impact of inflation will be benign, Philip Hammond, the Conservatives’ shadow chief secretary to the Treasury, said it was still a concern
“Every extension of the QE programme also adds to the longer-term risk of fuelling inflation when the economy recovers,” he added.