Bank of England pumps further £50bn into the 'weak' economy

Spending cuts, tax rises, tight credit and the eurozone crisis cited as 'headwinds' for the UK

The Bank of England's Monetary Policy Committee yesterday announced plans to inject a further £50bn into the ailing British economy over the next three months. Explaining its decision to increase the size of the asset purchase programme from £275bn to £325bn, the MPC conceded that business surveys since the turn of the year have shown an unexpectedly healthy economic picture, but warned that the "weak outlook for near-term growth means that a significant margin of economic slack is likely to persist".

The Bank said that tight credit conditions, along with the Government's spending cuts and tax rises, will continue to act as a "headwind" for the UK economy, which contracted by 0.2 per cent in the final quarter of 2011. There was also a warning about the risk from Europe, with the MPC cautioning that concerns remain over the economic health of some of Britain's continental trading partners.

The Bank said that without monetary stimulus it would be "more likely than not" that inflation would undershoot its 2 per cent target in the medium term. The consumer price index fell to 4.2 per cent in December and most analysts expect it to continue to drop throughout 2012. The Bank yesterday also kept its main interest rate at a record low of 0.5 per cent, a level it has been at for just short of three years.

An analysis by RBC Capital Markets suggests that the Bank of England will purchase around £16.7bn of gilts, of varying maturities, each month, between now and March. This means that the Bank of England will continue to buy up more gilts each month than are issued to the market by the Debt Management Office, although the pace of the net reduction of the size of the gilt market will slow. Financial markets had initially forecast the MPC to increase its gilt purchases by £75bn this month, but these expectations were pared back in the wake of a succession of CIPS/Markit surveys signalling a return to growth across the services, manufacturing and construction sectors.

The MPC said that the scale of its quantitative easing programme will be kept under review. And some analysts expect more asset purchases to come.

"We doubt that the Bank of England is done yet on quantitative easing and expect another £50bn dosage in May," said Howard Archer, economist at IHS Global Insight.

But Jens Larsen, of RBC Capital Markets, said that this would probably be the last round of QE. "The fact that the MPC chose to do £50bn when £75bn was clearly an option, points to it stopping purchases in May," he said.

Last year the Bank of England produced a research paper suggesting that the peak effect of the last round of QE was a boost to the level of GDP by up to 2 per cent. It said that the £200bn asset purchases had a similar effect to a 1.5 to 3 percentage point reduction in interest rates. However, economists are divided over the true impact of QE.

Adam Posen, an external member of the MPC, has pushed for the Bank to extend its asset purchases beyond gilts to include corporate bonds and small business loans in order to ease the flow of credit to the real economy.

Meanwhile, the National Institute of Economic and Social Research yesterday estimated that UK GDP contracted by 0.2 per cent in the three months ending in January, following a similarsized contraction over the three months ending in December. The think-tank said it expects output to remain flat for the rest of the year.

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