Bank of England injects £50bn into economy

 

The Bank of England injected a further £50 billion into the economy today as the UK battles to stave off another recession.

The Bank's Monetary Policy Committee (MPC) voted to increase the quantitative easing (QE) programme - effectively printing more cash - from £275 billion to £325 billion despite the risks it poses to the country's inflation rate. Meanwhile, it held interest rates at a record low of 0.5%.

The move will draw criticism from pensioners' groups who have warned that further QE could leave more than a million pensioners "permanently poorer for the rest of their lives" due to the adverse effect money-printing has on annuity rates.

But business leaders said further stimulus would "support confidence" and welcomed the decision.

The boost comes amid mixed signs for the economy as surprisingly upbeat industry surveys for January conflicted with a downgraded growth forecast from think-tank Niesr, while economists warned of the potentially damaging impact of recent extreme weather.

Explaining the move, the Bank said that while recent business surveys have "painted a more positive picture", the pace of expansion in the eurozone - the UK's main export market - has slowed and "concerns remain" about the region's debt levels.

The Bank said that tight credit conditions and the Government's austerity measures present headwinds looking ahead, while inflation, which dropped to 4.2% in December, should continue to fall sharply in the near term.

The Government and the Bank have both placed much of the blame for the UK's economic difficulties on the troubles in the eurozone, which still have no clear resolution.

But the MPC held fire on boosting QE in recent months as it waited for the last round of asset purchases, unveiled in October, to be completed.

The Bank said the £50 billion boost unleashed today would take three months to complete.

In a letter authorising the boost, Chancellor George Osborne said he agreed that an increase in the asset purchase ceiling would "provide the MPC with the scope to meet its inflation target".

But pensioners' groups have highlighted the difficulties such policy action can cause for retirees.

Annuity investors have seen rates plummet in recent years, as pensioners have faced a "perfect storm" of high living costs and low returns on their savings.

QE makes it cheaper for companies to borrow by pushing down the yield on government bonds, but annuity incomes are also based on these yields, meaning new pensioners see their incomes reduced.

The policy also has an impact on inflation, meaning pensioners can face higher living costs.

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

She said: "Around half a million annuities are sold each year and, since 2008, annuity rates have fallen by about 25%, most of which is due to the effect of QE.

"That means 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."

But the move was welcomed by David Kern, chief economist at the British Chambers of Commerce (BCC).

He said: "Although the benefits are not immediately obvious to the business community, quantitative easing plays a key role in strengthening the financial system and stabilising the wider economy."

TUC general secretary Brendan Barber said the decision was the "right thing to do, given the weak state of our economy".

He added: "But more needs to be done to ensure that this latest injection of cash actually reaches the businesses that need it, rather than just gathering dust on banks' balance sheets."

The closely-watched Markit/CIPS surveys showed that the manufacturing sector returned to growth in January, while the powerhouse services sector saw a record leap in optimism.

Despite the upbeat data, most analysts insisted it was still too early to call a recovery after respected thinktank NIESR warned recently that the UK economy would shrink by 0.1% in 2012 amid weak investment and uncertain conditions.

Meanwhile, recent extreme weather has clouded the picture further, with some economists warning that the heavy snowfall and icy conditions could hit economic output, as they did at the turn of the year in 2011.

The economy contracted by 0.2% in the final quarter of 2011, sparking fears that the UK would fall back into another recession - defined as two successive quarters of falls - albeit a much milder one than previously.

Howard Archer, chief UK and European economist at IHS Global Insight, said there were "compelling reasons" for the Bank to deliver further economic support.

He said: "It is far from certain that January's apparent pick-up in economic activity can be sustained and relapses remain a very real risk given still appreciable domestic and international - mainly eurozone - headwinds."

Shadow chancellor Ed Balls said: "The Bank of England is doing all it can to try and boost our flatlining economy, but it can't perform miracles.

"Simply printing more money cannot offset the contractionary effects of George Osborne's tax rises and spending cuts that go too far and too fast - a 'drag' on growth that the Governor of the Bank of England acknowledges in his letter today.

"With interest rates at record lows and confidence depressed, there is only so much a further loosening of monetary policy can do. After all, since the last round of quantitative easing was announced in October our economy has gone into reverse.

"Three years ago George Osborne said that quantitative easing was the last resort of desperate governments. He is now desperately hoping it will bail out his failing economic policy.

"But with unemployment soaring and £158 billion more borrowing than planned, what we desperately need is a change of course and Labour's five-point plan for jobs and growth to get our economy moving again and so get the deficit down."

Prime Minister David Cameron backed the move saying it made "good sense".

Speaking from a summit in the Swedish capital, Stockholm, he said: "This is the right stance to have.

"The combination of a tight fiscal policy with a looser monetary policy is the right answer for the UK and so I support what the Bank of England have done.

"It is a policy stance that makes good sense for the economy."

The National Association of Pension Funds (NAPF) said retirees would find that annuity rates, which set the size of their pension for life, have been "squashed" by QE.

The body said the decision would also cause a "headache" for companies running final salary pensions and could lead to more schemes being shut.

Joanne Segars, chief executive of the NAPF, said the last hit of QE increased pension fund deficits by an estimated £45 billion, and the latest round "will only add to that bill".

PA

News
John Travolta is a qualified airline captain and employed the pilot with his company, Alto
people'That was the lowest I’d ever felt'
Life and Style
healthIt isn’t greasy. It doesn’t smell. And moreover, it costs nothing
News
i100

Other places that have held independence referendums
Sport
Jonas Gutierrez (r) competes with Yaya Toure (l)
football

Newcastle winger Jonas Gutierrez reveals he has testicular cancer - and is losing his trademark long hair as a result

PROMOTED VIDEO
Arts and Entertainment
Blossoming love: Colin Firth as Stanley and Emma Stone as Sophie, in 'Magic in the Moonlight'
film

Actors star in Woody Allen's 'Magic in the Moonlight'

News
peopleThe Times of India said actress should treat it as a 'compliment'
News
news

Watch this commuter wage a one-man war against the Circle Line
News
We are phenomenally good at recognising faces; the study showed that humans have been selected to be unique and easily recognisable
science

Human faces unique 'because we don't recognise each other by smell'

Property
Home body: Badger stays safe indoors
lifeShould we feel guilty about keeping cats inside?
News
A male driver reverses his Vauxhall Astra from a tow truck
news

Man's attempt to avoid being impounded heavily criticised

News
ebooksAn unforgettable anthology of contemporary reportage
Arts and Entertainment
US pop diva Jennifer Lopez sang “Happy Birthday” to Gurbanguly Berdimuhamedow, president of Turkmenistan
musicCorporate gigs become key source of musicians' income
Arts and Entertainment
While many films were released, few managed to match the success of James Bond blockbuster 'Skyfall'
filmsDaniel Craig believed to be donning skis as 007 for first time
Student
The Guildhall School of Music and Drama is to offer a BA degree in Performance and Creative Enterprise
student

Arts and Entertainment
Pulp-fiction lover: Jarvis Cocker
booksJarvis Cocker on Richard Brautigan
Arts and Entertainment
Robin Thicke and Pharell Williams in the video of the song, which has been accused of justifying rape
music...and he had 'almost no part' in writing it
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Trainee Recruitment Consultant - Birmingham - Real Staffing

£18000 - £23000 per annum + Commission: SThree: Real Staffing are currently lo...

Recruitment Consultant - Soho - IT, Pharma, Public Sector

£20000 - £25000 per annum + OTE £35,000 first year: SThree: The SThree group i...

Sales Executive

£20 - 24k (Uncapped Commission - £35k Year 1 OTE): Guru Careers: We are seekin...

Payroll & Accounts Assistant

£20 - 24k + Benefits: Guru Careers: This is a great opportunity for an enthusi...

Day In a Page

Mystery of the Ground Zero wedding photo

A shot in the dark

Mystery of the wedding photo from Ground Zero
His life, the universe and everything

His life, the universe and everything

New biography sheds light on comic genius of Douglas Adams
Save us from small screen superheroes

Save us from small screen superheroes

Shows like Agents of S.H.I.E.L.D are little more than marketing tools
Reach for the skies

Reach for the skies

From pools to football pitches, rooftop living is looking up
These are the 12 best hotel spas in the UK

12 best hotel spas in the UK

Some hotels go all out on facilities; others stand out for the sheer quality of treatments
These Iranian-controlled Shia militias used to specialise in killing American soldiers. Now they are fighting Isis, backed up by US airstrikes

Widespread fear of Isis is producing strange bedfellows

Iranian-controlled Shia militias that used to kill American soldiers are now fighting Isis, helped by US airstrikes
Topshop goes part Athena poster, part last spring Prada

Topshop goes part Athena poster, part last spring Prada

Shoppers don't come to Topshop for the unique
How to make a Lego masterpiece

How to make a Lego masterpiece

Toy breaks out of the nursery and heads for the gallery
Meet the ‘Endies’ – city dwellers who are too poor to have fun

Meet the ‘Endies’ – city dwellers who are too poor to have fun

Urbanites are cursed with an acronym pointing to Employed but No Disposable Income or Savings
Paisley’s decision to make peace with IRA enemies might remind the Arabs of Sadat

Ian Paisley’s decision to make peace with his IRA enemies

His Save Ulster from Sodomy campaign would surely have been supported by many a Sunni imam
'She was a singer, a superstar, an addict, but to me, her mother, she is simply Amy'

'She was a singer, a superstar, an addict, but to me, her mother, she is simply Amy'

Exclusive extract from Janis Winehouse's poignant new memoir
Is this the role to win Cumberbatch an Oscar?

Is this the role to win Cumberbatch an Oscar?

The Imitation Game, film review
England and Roy Hodgson take a joint step towards redemption in Basel

England and Hodgson take a joint step towards redemption

Welbeck double puts England on the road to Euro 2016
Relatives fight over Vivian Maier’s rare photos

Relatives fight over Vivian Maier’s rare photos

Pictures removed from public view as courts decide ownership
‘Fashion has to be fun. It’s a big business, not a cure for cancer’

‘Fashion has to be fun. It’s a big business, not a cure for cancer’

Donatella Versace at New York Fashion Week