BoE prints fresh £50bn to help UK economy out of recession
Experts query the effect of cash injection as eurozone slumps
THE Bank of England (BoE) launched a third round of monetary stimulus yesterday, saying it would restart its printing presses and buy £50bn (€63bn) of government bonds with newly created money to help the economy out of recession.
The BoE's action, coming just two months after it ended a previous asset buying programme, coincided with interest rate cuts in China and the eurozone as the trio of central banks took steps to counter a global economic slowdown.
There is no guarantee the new cash injection, which the bank linked directly to the worsening backdrop in the eurozone, will offer a major boost to an economy officially in recession since late last year.
BoE governor Mervyn King has been adamant that bond purchases still work as a stimulus.
But policymakers Martin Weale and deputy governor Paul Tucker, as well as external economists, have voiced doubts about the effectiveness of the latest round of purchases, though some in the market still forecast the four-month programme would be extended.
"We continue to have doubts over how successful extra QE (quantitative easing) will be, but seeing as the BoE has few other options we expect them to stick with it," said James Knightley at ING.
The BoE bought £125bn of bonds between October and April, calling a halt in May largely because inflation was falling more slowly than hoped towards its 2pc target.
Since then, inflation has dropped to 2.8pc, and the BoE said a worsening economic situation in the eurozone was the main factor behind its decision to restart purchases.
"Without additional monetary stimulus, it was more likely than not that inflation would undershoot the target in the medium term," Mr King said in a letter to British chancellor George Osborne explaining the decision.
The BoE has bought £325bn of government bonds to date, and the purchases announced yesterday take this total to £375bn.
Britain's Conservative-Liberal Democrat coalition is largely reliant on the BoE to boost the economy because it has limited scope to cut taxes or raise spending while it tries to eliminate the country's big budget deficit over the next five years.
In a letter authorising yesterday's QE expansion, Mr Osborne confirmed that monetary policy was the "primary tool" to deal with a worsening economic outlook.
However, many economists think bond purchases are losing the effectiveness they had when they first started in March 2009.
Some BoE monetary policy committee members have doubts too and recommended last month -- when the committee split 5-4 against restarting QE -- that other complementary measures might be better suited to reducing firms' and households' borrowing costs.
The BoE says its purchases of government bonds help the economy by encouraging other investors to buy riskier assets instead, making it easier for large companies to raise funds through bond or share issues. But critics argue the BoE needs to do more to boost the flow of credit to smaller companies. (Reuters)