Bank of England backs another stimulus

AP News
Posted: Feb 09, 2012 7:44 AM
Bank of England backs another stimulus

The Bank of England is to inject another 50 billion pounds ($79 billion) into the British economy, which contracted in the last three months of 2011 and is likely to face further difficulties as Europe struggles to contain its raging debt crisis.

The new stimulus, approved by the nine-member Monetary Policy Committee on Thursday and which echoes moves by the U.S. Federal Reserve, had been widely expected in the markets following figures a couple of weeks back showing the British economy contracted by 0.2 percent in the fourth quarter of 2011. The accompanying decision to keep the main interest rate unchanged at the record low of 0.5 percent was expected too.

The hope is that by increasing the amount of money in the financial system, the purchases, known as quantitative easing or QE, will loosen credit for businesses and raise asset prices. Quantitative easing can be inflationary, but analysts say the bank has room to act especially as interest rates are set to fall sharply this year.

The fresh injection raises the total the Bank has ploughed into the program to 325 billion pounds ($515 billion). The program started in March 2009 after rates had been slashed to below 1 percent in the wake of the collapse of U.S. investment bank Lehman Brothers and the ensuing deep recession. It was paused in December before restarting again in October last year with a 75 billion pounds ($116 billion) injection.

"The committee judged that the weak near-term growth outlook and associated downward pressure from economic slack meant that, without further monetary stimulus, it was more likely than not that inflation would undershoot the 2 percent target in the medium term," the bank said in a statement.

Though inflation is running at 4.2 percent, and more than double the Bank's 2 percent target, it is expected to fall back sharply this year as last year's sales tax increase and energy price spike drop out of the annual comparison.

The latest attempt to boost the U.K. economy comes ahead of next week's quarterly economic projections from the bank and there will be a lot of interest to see if it's forecasting a recession _ officially defined as two consecutive quarters of negative growth.

On a moderately upbeat note, the bank said some recent surveys have painted a more positive picture. However, it said the " pace of expansion in the United Kingdom's main export markets has also slowed and concerns remain about the indebtedness and competitiveness of some euro-area countries."

Britain's economy, like others, has been hit by the debt crisis in the 17-nation eurozone, widely considered to be the biggest risk to the global economic recovery. A key concern is that a prospective recession in the eurozone will make it even more difficult for Britain's exporters _ the eurozone is the U.K.'s main export market.

The Bank also said a gradual strengthening of growth later this year "should be supported by a gentle recovery in household real incomes as inflation falls, together with the continued stimulus from monetary policy."

Minutes to Thursday's meeting will be published the week after next, and investors will be interested to see whether the decision to pump more money into the U.K. economy was unanimous.

Chris Williamson, chief economist at financial data company Markit, said recent good news on the economic front made it unlikely that the committee decision was unanimous, and that "is likely to have reduced the chance of further stimulus in coming months."

However, Vicky Redwood, chief U.K. economist at Capital Economics, says she believed the program "has much further to go" and will eventually reach the region of 500 billion pounds ($792 billion).