Friday 7 October 2011

Bank of England pumps up economy

Bank of England pumps up economy


The Bank of England has taken fresh emergency stimulus measures, planning to inject STG75 billion ($A120 billion) into a British economy caught up in possibly "the most serious financial crisis" ever.

After a two-day policy meeting, the BoE approved increasing its quantitative easing (QE) by STG75 billion to STG275 billion over a four-month period, sooner than had been expected by many analysts.

The Bank of England's nine-member Monetary Policy Committee (MPC) also decided to keep the main interest rate at a record-low 0.50 per cent, it said.

"This is the most serious financial crisis we've seen at least since the 1930s, if not ever," BoE governor Mervyn King told Sky News television following the policy announcements on Thursday.

"We're having to deal with very unusual circumstances and to act calmly and do the right thing. The right thing at present is to create some more money to inject into the economy."

Under QE, the bank creates new cash which is used to purchase assets such as government and corporate bonds in a bid to encourage lending and in turn boost economic activity.

The BoE injected STG200 billion into the economy between March 2009 and January 2010 but the economy has struggled and over the past nine months has virtually come to a halt.

The pound on Thursday hit a 14-month low at $US1.5272 as investors envisaged no hike to British interest rates for a very long time. The London stock market closed up 3.71 per cent, helped by EU moves to sort out the eurozone debt crisis, traders said.

Finance Minister George Osborne authorised the resumption of the emergency policy in an official letter to Bank of England governor Mervyn King.

The policy announcements came one day after official data showed the British economy had flatlined over the past nine months and that the 2008-09 recession was worse than previously thought, with a peak-to-trough contraction of 7.1 per cent, rather than the previous estimate of 6.4 per cent.

The European Central Bank meanwhile held its key interest rate at 1.5 per cent, shrugging off speculation it could cut borrowing costs to help combat the region's sovereign debt crisis.

The BoE warned that Britain's recovery was endangered by a flat world economy and the eurozone crisis that has so far resulted in EU-IMF bailouts for Greece, Ireland and Portugal.

"Vulnerabilities associated with the indebtedness of some euro-area sovereigns and banks have resulted in severe strains in bank funding markets and financial markets more generally. These tensions in the world economy threaten the UK recovery," the central bank said.

The BoE's key interest rate has stood at 0.50 per cent since March 2009, when it decided to begin pumping new cash into the economy under QE.

Experts claim that while QE can help to kick-start an economy, it also threatens to fuel inflation, which in the long run can actually hinder growth.

With British annual inflation currently at 4.5 per cent - far above the BoE's two per cent target - the bank faces a tricky balancing act.

The economy grew by just 0.1 per cent in the three months to June.

Britain hauled itself out of a deep recession in the third quarter of 2009, but its recovery has also been severely constrained by the impact of collapsing consumer confidence and painful state austerity cuts.

Roland Jackson

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