The Bank of England has brought to a close its unprecedented experiment in "quantitative easing". The Bank's £200bn direct injection of money into the economy is now complete – the most radical easing of monetary conditions in British economic history and, proportional to the size of the UK economy, the largest in the world.
As was also widely anticipated, the Monetary Policy Committee (MPC) yesterday kept interest rates at 0.5 per cent, the lowest level in the Bank's 316-year history.
In an accompanying statement the Bank stressed the fragility of the current "sluggish" recovery, and did not rule out a return to the policy in future.
The Bank said: "The considerable stimulus from the easing in monetary policy, the lower level of sterling and the recovery in UK export markets should together support domestic activity.
"But credit conditions are likely to remain restrictive, while the need to strengthen public and private sector finances will also weigh on spending. On balance, the Committee believes that the prospect is for a gradual recovery in the level of activity."
The Bank's caution pushed gilt prices slightly lower and yields a little higher, as analysts took the statement to mean that it will be in no hurry to raise rates.
The programme of quantitative easing (QE) was launched last March with an initial commitment of £75bn from a total budget of £150bn, which was expanded to reach £200.4bn by the end of January. Reaction was generally positive, with most external economists appreciating the "knife edge" the Bank is once again perched upon, attempting to protect an economy that has crawled back to growth – of 0.1 per cent in the last quarter of 2009 – while inflation has surged.
The Bank played down its challenge on inflation, stressing that much of the 2.9 per cent rise in the Consumer Prices Index (CPI) in December was down to special factors: "That rise was largely accounted for by higher petrol price inflation and the reduction in the main VAT rate a year earlier dropping out of the calculation. Inflation is likely to have risen further in January, reflecting the restoration of the VAT rate to 17.5 per cent. Pay growth has remained subdued." The Bank's Inflation Report, next Wednesday, will offer further explanation.
Graeme Leach, the chief economist at the Institute of Directors, said: "The MPC is engaged in a difficult juggling act. On the one hand, anaemic GDP and money supply figures argue that quantitative easing should be extended, but, on the other, the increase in inflation has exceeded expectations and suggests a need for caution. Our view remains that until money supply growth strengthens further sustainable recovery will be in doubt. A double dip, or even triple tumble, recession remains a serious possibility."
The Bank also said additional purchases of corporate bonds and commercial paper would continue to be undertaken to boost their liquidity – but that these will be "funded" by the issue of Treasury bills rather than central bank money.
Some economists are urging the Bank to change tack. Colin Ellis, of Daiwa Securities, said: "We have argued that, with the impact of gilt purchases on the real economy being very hard to spot, the Bank needs a Plan B, and should consider different options, including buying more private securities. The MPC's Plan B appears to be 'more of Plan A'. If QE suddenly starts to have a big impact, that is fine. But if it does not, history may judge that the Committee was found wanting both on the way into recession, and on the way out as well."