Monday 19 March 2018

Bank of England injects £50bn into economy

Getty Images
Getty Images

Angela Monaghan

BANK of England policy-makers have announced plans to pump £50bn (€60bn) of additional stimulus into the economy in an attempt to avert a second recession.

The Bank's Monetary Policy Committee voted to increase its quantitative easing programme, which will take the total assets purchased to £325bn since the process was first started in March 2009. It said the latest round of purchases would take three months to complete.

Interest rates were left on hold at 0.5pc as expected.

In a statement accompanying the decision, the Bank justified its decision against a backdrop of a weak economy, uncertain outlook, and falling inflation. It said without more stimulus, inflation was more likely to fall below the 2pc target in the medium-term.

The Bank said: "In the United Kingdom, the underlying pace of recovery slowed during 2011, with activity falling slightly during the final quarter.

"Some recent business surveys have painted a more positive picture and asset prices have risen. But 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."

"CPI inflation has fallen back from its September peak, declining to 4.2pc in December. Inflation should continue to fall sharply in the near term, as the increase in VAT in January 2011 drops out of the twelve-month comparison."

Following its decision, the Bank published an exchange of letters between its Governor Sir Mervyn King, and the Chancellor George Osborne.

The Chancellor said QE to date had supported the UK economy and backed an expansion.

"Monetary policy continues to have a critical role in supporting the economy as the Government delivers on its commitment to fiscal consolidation and it remains the primary tool for responding to changes in the economic outlook," he said.

There have been a number of upbeat UK economic indicators for January in recent days, but the economy contracted by 0.2pc in the fourth quarter according to official data and the prospect of a return to recession hangs in the balance.

While economists agreed that an expansion of QE was the most likely outcome of today's meeting, some argued a unanimous decision was less likely in light of the stronger than expected January data. A breakdown of voting will be contained within the minutes which will be published in a fortnight.

David Miles and Adam Posen have both been enthusiastic backers of QE, while Spencer Dale, the Bank's chief economist, has cautioned in the past that the MPC would have to see a definite trend towards lower inflation before backing an increase.

Inflation fell from a high of 5.2pc to 4.2pc in December in the latest available data.

The MPC will have had chance over the course of its two-day meeting to consider the Bank's latest forecasts for growth and inflation, which will be made public when the Bank's February Inflation Report is published next week.

"We doubt that the Bank of England is done yet on Quantitative Easing and expect another £50 billion dosage in May which would take the total up to £375bn," said Howard Archer, economist at IHS Global Insight.

"Meanwhile, interest rates remain highly unlikely to move from the current level of 0.5pc for many, many months to come."

Further QE is likely to spell bad news for people set to retire this year as annuity rates plummet, leaving pensioners facing high living costs and low returns on their savings.

Research from financial services company Hargreaves Lansdown found that a 65-year-old man with £100,000 could have bought a level income of £7,855 in July 2008, but someone in the same situation today would only receive an income of £5,923, a drop of just under 25pc.

Dr Ros Altmann, director-general of Saga, said the "short-term stimulus" of QE has "very dangerous long-term consequences".

She said: "Buying gilts is not the best way to stimulate growth - it does, of course, help the banks, but it actually has side-effects that directly damage the economic outlook.

"Having more and more poorer pensioners and forcing companies to put money into their pension schemes, rather than their business operations, is a drag on growth, not a boost."

She said tumbling annuity rates mean that "over a million pensioners will be permanently poorer for the rest of their lives, as they have bought an annuity at rates that have been artificially depressed by the Bank of England".

"The impact of QE on pensions and pensioners will lead to lower growth, so we urge the Bank to consider different ways of using newly created money to try to boost the economy."

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