£75bn pumped into British economy 'to prevent crash'
Creation of new money will be 'Titanic disaster' for pensioners, warn financial experts
Published 07/10/2011 | 05:00
The world faces the worst financial crisis since the 1930s, "if not ever", the governor of the Bank of England warned last night.
Mervyn King spoke after the Bank's Monetary Policy Committee (MPC) moved to inject £75bn (€86bn) of newly created money into the British economy in a desperate effort to stave off a new credit crisis and a UK recession.
Economists said the Bank of England's decision to resume its asset purchase -- or quantitative easing (QE) -- programme showed it was increasingly fearful for the UK economy, and predicted more such moves in the coming months.
Mr King said the bank had been driven to the "unfamiliar" move by growing signs of a global economic disaster.
"This is the most serious financial crisis we've seen, at least since the 1930s, if not ever," he told Sky News. "We're having to deal with very unusual circumstances -- but react calmly to this and to do the right thing."
Announcing its decision, the bank said that the eurozone debt crisis was putting "severe strains in bank funding markets and financial markets". The MPC also said that both the inflation-driven "squeeze on households' real incomes" and the government's programme of spending cuts would "continue to weigh on domestic spending" for some time to come.
The "deterioration in the outlook" meant more QE was justified, the bank said.
Financial experts said the MPC's actions would be a "Titanic" disaster for pensioners, savers and workers approaching retirement. Mr King signalled that was a price worth paying to save the economy from recession.
QE involves the Bank of England electronically creating new money which it then uses to buy assets like government bonds -- gilts -- from banks.
In theory, the banks then use the cash they gain to increase their lending to businesses and individuals. And by increasing the demand for gilts, QE also pushes down the interest rates yields paid to holders of gilts and other bonds.
Critics of the policy say that it pushes up inflation and drives down the value of sterling.
The National Association of Pension Funds (NAPF) yesterday called for urgent talks with ministers to address the negative impact of lower gilt yields on pension funds.
QE "makes it more expensive for employers to provide pensions and will weaken the funding of schemes as their deficits increase," said Joanne Segars, chief executive of the NAPF.
"All this will put additional pressure on employers at a time when they are facing a bleak economic situation."
The latest round of asset purchases is sometimes known as QE2, but Ros Altman, of Saga, said the move was "a Titanic disaster" that would increase pensioner poverty. As well as fuelling inflation, she said falling bond yields would make annuities more expensive, "giving new retirees much less pension income for their money and leaving them permanently poorer in retirement".
A group of protesters demonstrated outside the Bank of England's headquarters yesterday, smashing a giant piggybank to symbolise the situation of pensioners and others forced to raid savings to keep up with the rising cost of living.
But asked about the plight of savers, Mr King said it was more important to support the wider economy than to support them. Savers would not be helped by deliberately pushing the British economy into recession, he suggested.
Yesterday's decision was the first move on QE since 2009 during the global credit crunch, when the bank injected £200bn into the economy.
Some analysts believe that this round of QE could be less effective than the last, forcing the bank to create even more money this time.
Michael Saunders, of Citigroup, forecast as much as £225bn more QE by next year.
"I think they will do lots more QE," he said. "It's both that the economy is weak but also that the MPC's view is that QE is not a very powerful tool, or rather it takes a large amount of QE to have much effect on the economy."
The Bank of England is supposed to keep inflation near a target of 2pc. Inflation now stands at 4.5 pc and the bank admitted it is likely to hit 5pc as soon as this month. (© Daily Telegraph, London)