Rate-setters pump £50bn more into economy

Bank of England rate-setters doused hopes of a rapid recovery today after a surprise move to pump an extra £50bn into the flagging economy.

The decision - taking quantitative easing efforts to boost the money supply to £175bn - is the clearest sign yet that policymakers think the UK is still deep in the mire.

The move confounds speculation before the Monetary Policy Committee's (MPC) latest meeting that QE could be paused amid encouraging signs from industry as well as rising house prices.

But the MPC, which also left interest rates unchanged at their 0.5 per cent record low, said the recession "appears to be deeper than previously thought".

Rate-setters called financial conditions "fragile", and warned that growth in the money supply - which it hopes will boost the economy - "remains weak".

Official estimates showed a disappointing 0.8 per cent fall in output during the second quarter of this year, while figures also showed a £14.7bn fall in loans to businesses - hampering recovery.

"Though there are signs that credit conditions may have started to ease, lending to business has fallen and spreads on bank loans remain elevated," the Bank said.

Despite the stimulus moves from the MPC and a weaker pound, it added: "The need for banks to continue repairing their balance sheets is likely to restrict the availability of credit, and past falls in asset prices and high levels of debt may weigh on spending."

Royal Bank of Scotland head of economics Stephen Boyle said the MPC had "decided it is better to be safe than sorry".

"This tells us that the committee believes the economy remains in intensive care," he said.

The FTSE 100 Index shrugged off the surprise decision to continue its recent run higher, although the pound lost almost two cents against the dollar.

In an exchange of letters with Bank Governor Mervyn King, Chancellor Alistair Darling agreed to increase the QE threshold to £175bn.

Richard Lambert, director-general of the CBI business group, said: "This must have been a finely balanced decision. The economic outlook has brightened a little in recent weeks, which might have argued for a pause."

But Corin Taylor, senior policy adviser at the Institute of Directors, also warned of the danger of "overshooting" with QE.

"The risk of inflation further out means that some caution is still necessary. Right now the economy needs all the monetary support it can get, but at some point QE will have to be reversed," he said.

The MPC is charged with keeping Consumer Price Index inflation at 2 per cent and its decision will have been made with reference to the Bank's latest forecasts, which are published next week.

CPI fell below the 2 per cent target for the first time in almost two years in June at 1.8 per cent - but is expected to fall further still, and today's move signals a much bigger push is needed to get it back to the target.

"While some recovery in output growth is in prospect, the margin of spare capacity in the economy is likely to continue to grow for some while yet, bearing down on inflation in the medium term," the Bank said.

The committee's caution underlines how a weak banking sector could yet weigh on recovery as the supply side of the economy is restricted by lower lending levels.

Despite £6bn in combined profits from HSBC and Barclays on Monday, Lloyds Banking Group and nationalised Northern Rock have reported losses of £4bn and £724 million respectively.

According to official estimates, the UK economy has now shrunk by 5.7 per cent since the first quarter of 2008.

This is more than double the depth of the early 1990s' recession and approaching the level of the slump seen in the early 1980s.