Bank drives another £25bn of new cash into economy

Published on Thursday 5 November 2009 21:27

THE Bank of England has decided to pump an extra £25 billion directly into the economy through its scheme of quantitative easing (QE) in a bid to end the longest British recession since records began.

The monetary boost, announced yesterday, came after shock official figures showed Britain was still in recession, declining by 0.4 per cent in a quarter.

The Bank's monetary policy committee also left interest rates on hold at 0.5 per cent for the eighth month in a row.

So far, the Bank of England has injected 200bn as part of its quantitative easing strategy.

This is where it literally prints money and uses it to buy bonds from banks and other companies, to encourage spending and lending.

But Vince Cable, the Liberal Democrat's Treasury spokesman, warned the Bank of England's decision risked simply "throwing more and more money at a problem".

Read Bill Jamieson's analysis of this story here

Mr Cable said that while he supported the policy of quantitative easing, only financial institutions seemed to be benefiting, and the wider economy was still "a long way from recovery".

Bank of England Governor Mervyn King had to write to Chancellor Alistair Darling for permission to inject the 25bn.

"Households have reduced their spending substantially and business investment has fallen especially sharply," Mr King wrote to Mr Darling. "A number of indicators of spending and confidence, however, suggest that a pickup in economic activity may soon be evident."

The Bank said it would keep its asset purchase programme under review and this round of spending would take three months to complete.

It added that banks' funding conditions had improved, but said "financial conditions remain fragile".

The additional expenditure marks the smallest increase in the policy since it was launched in March and was less than the 50bn predicted by many economists in the wake of third-quarter figures showing the UK remained in recession.

Other comparable economies, including France, Germany and the United States, have already emerged from recession.

Stephen Boyle, head of RBS Group Economics, said there was "no plan B".

"The UK economy is still in the high dependency unit, but without QE it might have been in intensive care, or worse," he said.

"The extension of the Bank's asset purchase scheme today reminds us that the risks of doing too little considerably outweigh the risks of doing too much."

But other commentators questioned the strategy.

SNP Treasury spokesman Stewart Hosie said: "These eye-watering sums underline the fragility of the economy, and the real failure of the UK government to get a grip.

"Quantitative easing was intended to boost lending to business but the MPC still warn that UK banks are failing to provide enough credit to businesses and households."

Ian McCafferty, CBI chief economic adviser, said he welcomed the decision.

"Extending quantitative easing ought to provide an extra degree of support for business and consumer confidence," he said.

"Although it is difficult to know the extent of the impact of QE, its effects appear to have been positive so far."

The increased money supply could eventually lead to a rise in inflation and many analysts expect interest rates to rise next year.