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

Start your day with The Independent, sign up for daily news emails
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

Guru Careers: Software Developer / C# Developer

£40-50K: Guru Careers: We are seeking an experienced Software / C# Developer w...

Neil Pavier: Management Accountant

£45,000 - £55,000: Neil Pavier: Are you looking for your next opportunity for ...

Sheridan Maine: Commercial Accountant

£45,000 - £55,000: Sheridan Maine: Are you a newly qualified ACA/ACCA/ACMA qua...

Laura Norton: Project Accountant

£50,000 - £60,000: Laura Norton: Are you looking for an opportunity within a w...

Day In a Page

Sun, sex and an anthropological study: One British academic's summer of hell in Magaluf

Sun, sex and an anthropological study

One academic’s summer of hell in Magaluf
From Shakespeare to Rising Damp... to Vicious

Frances de la Tour's 50-year triumph

'Rising Damp' brought De la Tour such recognition that she could be forgiven if she'd never been able to move on. But at 70, she continues to flourish - and to beguile
'That Whitsun, I was late getting away...'

Ian McMillan on the Whitsun Weddings

This weekend is Whitsun, and while the festival may no longer resonate, Larkin's best-loved poem, lives on - along with the train journey at the heart of it
Kathryn Williams explores the works and influences of Sylvia Plath in a new light

Songs from the bell jar

Kathryn Williams explores the works and influences of Sylvia Plath
How one man's day in high heels showed him that Cannes must change its 'no flats' policy

One man's day in high heels

...showed him that Cannes must change its 'flats' policy
Is a quiet crusade to reform executive pay bearing fruit?

Is a quiet crusade to reform executive pay bearing fruit?

Dominic Rossi of Fidelity says his pressure on business to control rewards is working. But why aren’t other fund managers helping?
The King David Hotel gives precious work to Palestinians - unless peace talks are on

King David Hotel: Palestinians not included

The King David is special to Jerusalem. Nick Kochan checked in and discovered it has some special arrangements, too
More people moving from Australia to New Zealand than in the other direction for first time in 24 years

End of the Aussie brain drain

More people moving from Australia to New Zealand than in the other direction for first time in 24 years
Meditation is touted as a cure for mental instability but can it actually be bad for you?

Can meditation be bad for you?

Researching a mass murder, Dr Miguel Farias discovered that, far from bringing inner peace, meditation can leave devotees in pieces
Eurovision 2015: Australians will be cheering on their first-ever entrant this Saturday

Australia's first-ever Eurovision entrant

Australia, a nation of kitsch-worshippers, has always loved the Eurovision Song Contest. Maggie Alderson says it'll fit in fine
Letterman's final Late Show: Laughter, but no tears, as David takes his bow after 33 years

Laughter, but no tears, as Letterman takes his bow after 33 years

Veteran talkshow host steps down to plaudits from four presidents
Ivor Novello Awards 2015: Hozier wins with anti-Catholic song 'Take Me To Church' as John Whittingdale leads praise for Black Sabbath

Hozier's 'blasphemous' song takes Novello award

Singer joins Ed Sheeran and Clean Bandit in celebration of the best in British and Irish music
Tequila gold rush: The spirit has gone from a cheap shot to a multi-billion pound product

Join the tequila gold rush

The spirit has gone from a cheap shot to a multi-billion pound product
12 best statement wallpapers

12 best statement wallpapers

Make an impact and transform a room with a conversation-starting pattern
Paul Scholes column: Does David De Gea really want to leave Manchester United to fight it out for the No 1 spot at Real Madrid?

Paul Scholes column

Does David De Gea really want to leave Manchester United to fight it out for the No 1 spot at Real Madrid?