Bank of England halts quantitative easing scheme

Further economy-boosting measures were put on hold today after the Bank of England opted not to extend its quantitative easing scheme.

The Bank has so far pumped £200 billion in newly-created money into the economy after finishing its latest round of assistance last week.

Today's wait-and-see approach from policymakers also saw interest rates held at 0.5 per cent - continuing almost a year of record low borrowing costs.

Experts had widely predicted a no-change position from the nine-strong Monetary Policy Committee (MPC) after a surprisingly weak climb out of recession in the final quarter of last year tested resolve.

The UK's longest period of decline ended with growth of just 0.1 per cent in the last three months of 2009, leading to fears of a so-called "double dip" recession.

As a result, some economists predict that the Bank will keep the door open to more QE if the economy continues to struggle.

The MPC had access to detailed economic forecasts from the Bank's forthcoming quarterly inflation report during their two-day meeting.

Recent signs on the economy have been underwhelming, with figures from the UK's crucial services sector showing slowing growth last month after disruption from the snowy weather.

Meanwhile, Consumer Prices Index inflation jumped at a record rate to 2.9 per cent in December - well above the Bank's 2 per cent target.

There are concerns among committee members that inflation may become a problem, although the weakness of the banking sector and credit availability is providing deflationary pressure.

A statement from the Bank did not rule out a further increase in the QE programme.

"The committee will continue to monitor the appropriate scale of the asset purchase programme and further purchases would be made should the outlook warrant them," it said.

The Bank said the UK had seen "sluggish growth" in the last quarter of 2009.

"On balance, the committee believes that the prospect is for a gradual recovery in the level of activity," it said.

"The recession has probably impaired the supply capacity of the economy, but the scale and persistence of the fall in output means that a substantial margin of under-utilised resources is likely to remain for some time to come."

The Bank said this meant inflation would fall below the 2% target for a while.

It said stimulus measures so far, along with the weaker pound and the recovery in UK export markets "should together support domestic activity".

But it warned that credit conditions are likely to remain tough and stressed that the need to strengthen public and private sector finances would weigh on spending.

The Bank noted a small pick-up in household spending, but said that could partly be down to temporary factors.

Meanwhile, it said the rate of decline in businesses' investment spending appeared to have eased.

RBS economist Stephen Boyle said the Bank's money-boosting measures had probably reached the end of the road.

"But by pausing QE rather than ceasing it, the Bank has signalled that this will be a long bend, not a hairpin turn and the risk remains that the economy could stumble again and need a further injection of steroids," he said.

Howard Archer, of IHS Global Insight, said today's inaction was "actually a significant policy development".

"Significantly, the MPC has left the door open for further QE should the recovery falter or even fail to gain momentum over the coming months," he said.

Mr Archer predicts interest rates could stay on hold until towards the end of this year at the earliest.

"Furthermore, the eventual increases in interest rates are likely to be limited to counter the restrictive impact of the tight fiscal policy that will increasingly have to be enacted from 2011/12 to rein in the bloated public finances," he added.

The CBI business group said the Bank's decision to hold fire was "unsurprising".

Chief economic adviser Ian McCafferty said: "The situation is finely balanced.

"The economy is stabilising but still faces some serious headwinds, and recovery remains shallow-rooted."