QE increased by £25bn
THE Bank of England chose to pump more new money into the financial system today as it held rates at 0.5% for the eighth consecutive month.
The Bank extended its money-printing scheme – known as quantitative easing – by £25bn to take the scale of the cash injection to £200bn.
Quantitative easing (QE) aims to stimulate the economy by printing money and using it to buy bonds from financial institutions.
With the economy still in recession many economists believe QE will trigger a recovery. But it has its detractors who fear it is stoking future inflation.
In a statement the Bank said the medium-term prospects for output and inflation continue to be determined by a balance between two opposing sets of forces: the easing of monetary and fiscal policy that has helped boost asset prices, and the need for the banks to continue repairing their balance sheets which will limit the availability of credit.
“On balance, the [monetary policy] committee believes that the prospect is for a slow recovery in the level of economic activity, so that a substantial margin of under-utilised resources persists,” said the Bank.
“That will continue to bear down on inflation for some time to come, offset in the short run by the impact of the past depreciation of sterling.”
The Bank said the latest tranche of QE cash would take three months to work through the system. The scale of the programme will be kept under review.
Chris Fletcher, deputy chief executive of Greater Manchester Chamber, said: “There are increasing signs of optimism, but there still needs to be further action before we see the foundations of a real recovery.
“The jury is still out on whether the medicine has worked. Businesses are still saying that there is a blockage in the credit system which is putting a major brake on financial stimulus. Therefore we are pleased that they have taken heed of what businesses have said and increased quantitative easing.”
The Bank of England is expected to hold its position on rates for some time and has been encouraged by some interest groups to impose a negative interest rate on bank reserves to encourage banks to lend money rather than store it. On Wednesday the US central bank, the Federal Reserve, chose to keep interest rates at between 0%-0.25%.
