The bank of England surprised observers with an early announcement of an extension to its programme of "quantitative easing", or so-called printing money. Another £50bn will be spent by the Bank on buying gilts, commercial paper and corporate bonds in a renewed effort to free up the cost and availability of credit, boost spending in the economy and thus eventually push inflation back up towards the 2 per cent target, which it is expected to fall well below in the immediate months ahead. The Bank also kept official interest rates at an historic low of 0.5 per cent.
In a parallel move, the European Central Bank announced a policy of pushing private sector covered bonds, though this would be "sterilised" and thus create no new money, as the Bank of England is doing. The ECB reduced rates by 0.25 per cent to 1 per cent.
In an accompanying statement the Bank's Monetary Policy Committee gave an assessment of the "countervailing forces" at work: "The process of adjustment in train in the UK economy, as private saving rises and banks restructure their balance sheets, combined with weak global demand, will continue to act as a significant drag on economic activity.
"But pushing in the opposite direction, there is considerable economic stimulus stemming from the easing in monetary and fiscal policy, at home and abroad, the substantial depreciation in sterling, past falls in commodity prices, and actions by authorities internationally to improve the availability of credit. That stimulus should in due course lead to a recovery in economic growth... But the timing and strength of that recovery is highly uncertain."
The MPC's move was taken by many analysts as evidence that the Bank may be worried about its policy. Many assumed that the Bank would pause after spending the initial £75bn it budgeted for the policy, of which about £50bn has been used up. The £50bn will be added to the remaining £25bn of that initial allocation and the injection of cash into the economy will be maintained at about £25bn per month.
As in the past, the vast majority of the money is likely to be used to buy gilts in the 5- to 25-year maturity range.
A total of £150bn was earmarked as being available for the scheme when it was launched in March. It had a marked initial success in getting the key 10-year gilt yield down, but since then rates have picked up again. Yesterday the rate sank slightly on the Bank's announcement, but still ended the day a few points higher, at just over 3.7 per cent.
However, other early indicators of the success of quantitative easing are more encouraging; growth in the money held by households and non-bank private companies are showing broadly stronger growth, though low by normal standards.
Credit conditions surveys by the Bank, the CBI and the British Chambers of Commerce also suggest, tentatively, that the availability of credit, if not always its cost, has been improving, or is expected to ease soon. Mortgage approvals have edged upwards recently, though again running far below pre-crunch levels.
The Bank's Inflation Report next Wednesday will give its definitive view.Reuse content