UK facing most serious crisis ever, says Mervyn King

Sir Mervyn King tonight said the Bank of England's surprise move to pump £75 billion into the UK economy was the right thing to do as the country faced "the most serious financial crisis" ever seen.

The Bank's governor was speaking after the Monetary Policy Committee (MPC) voted to boost its quantitative easing (QE) programme - effectively printing more cash - from £200 billion to £275 billion and hold interest rates at 0.5%.



The move, dubbed QE2, is the first change to QE since November 2009 and is the clearest signal yet that the Bank thinks Britain is on the brink of a double-dip recession.



Explaining the committee's reasoning, Sir Mervyn said: "This is the most serious financial crisis we've seen at least since the 1930s, if not ever.



"We're having to deal with very unusual circumstances and to act calmly and do the right thing. The right thing at present is to create some more money to inject into the economy."





Business leaders welcomed the announcement after figures revealed Britain suffered a deeper recession and is recovering more slowly than first thought.



However, the decision raised fears over the impact on pension funds and some groups warned a surge in the already-high rate of inflation would erode savings.



The value of the pound sank against most major currencies following the announcement, while the FTSE 100 Index closed more than 3% higher, boosted in part by the Bank's decision.



Elsewhere, the European Central Bank (ECB) offered new emergency loans to banks to help steady a eurozone financial system shaken by the region's deepening debt crisis.



Alan Clarke, UK economist at Scotia Capital, said: "Once again the BoE has made use of its secret weapon - shock and awe. Pretty much everyone expected QE to restart at some point - but it was only a minority view that it would start this soon, or in excess of £50 billion."



A report by the Bank into the effect of QE on the economy previously found the stimulus measure provided a "significant" benefit to growth and helped GDP increase by around 1.5% and 2%. This was equivalent to dropping interest rates by between 1.5% and 3%.



The MPC said its members made the decision to boost QE over the next four months because the slack in the UK economy will likely be "greater and more persistent than previously expected".



Sir Mervyn added: "The world economy as a whole is slowing down much faster than people thought even a few months ago, that's why it's sensible for monetary policy to respond to changes - when the world changes we change our response."



The committee also warned the squeeze on household incomes and the Chancellor's austerity measures are likely to continue to restrict spending while ongoing strains on the banks will limit credit supply.



The deterioration in the economic outlook means it is more likely that inflation - which hit 4.5% in August - will undershoot the 2% target in the medium term, the Bank added.



David Kern, chief economist at the British Chambers of Commerce, welcomed the move but said increasing QE was not enough to support businesses.



"In the face of the risks facing Britain's recovery, it is important to make every effort to underpin business confidence and avoid a setback," he said.



"However, higher QE on its own is not enough, and we urge the MPC to look at other radical methods."



John Walker, national chairman of the Federation of Small Businesses, said it was vital the cash went to businesses and was not swallowed up by the banks.



He said: "It is important that in an attempt to boost short-term demand that small businesses can directly benefit from this cash injection and that the banks use it to decrease the cost of credit and to increase the availability of lending."



QE can fuel inflation which could spell more gloom for savers who have seen their pots chipped away by the high cost of living and low interest rates.



In addition, QE increases the cost of gilts - government-backed bonds which fund annuities, the level of pension payments - and by keeping interest rates down, reduces the overall return on pensions.



The National Association of Pension Funds (NAPF) called for an urgent meeting with the Pensions Regulator to discuss ways of protecting pensions from the impact of QE.



Joanne Segars, chief executive at NAPF, said: "Quantitative easing makes it more expensive for employers to provide pensions, and will weaken the funding of schemes as their deficits increase. All this will put additional pressure on employers at a time when they are facing a bleak economic situation."



Dr Ros Altmann, director general of over-50s lobby group Saga, said further QE was "like launching the Titanic" due to its potential impact on savings.



She said: "The last round of QE was supposed to stimulate UK growth and fight deflation, but instead it boosted prices, bank bonuses and borrowers' balance sheets. It actually created asset bubbles and inflation, not sustainable growth."



Elsewhere, fears are increasing over the future of the eurozone as Greece fights to stave off a debt default, Italy's public finances come under pressure and major European banks falter.



The ECB held interest rates - some had expected them to be cut - but instead offered an unlimited amount of 12-month and 13-month loans to banks. The measures are designed to keep the financial system working properly.

PA

Arts & Entertainment
Madonna in her music video for 'Like A Virgin'
music... and other misheard song lyrics
News
Waitrose will be bringing in more manned tills
newsOverheard in Waitrose: documenting the chatter in 'Britain's poshest supermarket'
News
The energy drink MosKa was banned for containing a heavy dose of the popular erectile dysfunction Levitra
news
News
Much of the colleges’ land is off-limits to locals in Cambridge, with tight security
educationAnd has the Cambridge I knew turned its back on me?
VIDEO
Sport
Australia's Dylan Tombides competes for the ball with Adal Matar of Kuwait during the AFC U-22 Championship Group C match in January
sportDylan Tombides was diagnosed with testicular cancer in 2011
News
Ida Beate Loken has been living at the foot of a mountain since May
newsNorwegian gives up home comforts for a cave
Extras
indybest10 best gardening gloves
News
Russia's President Vladimir Putin gives his annual televised question-and-answer session
peopleBizarre TV claim
Arts & Entertainment
tvIt might all be getting a bit much, but this is still the some of the finest TV ever made, says Grace Dent
Arts & Entertainment
Comedian Lenny Henry is calling for more regulation to support ethnic actors on TV
tvActor and comedian leads campaign against 'lack of diversity' in British television
News
Posted at the end of March, this tweeted photo was a week off the end of their Broadway shows
people
News
peopleStar to remain in hospital for up to 27 days to get over allergic reaction
Arts & Entertainment
The Honesty Policy is a group of anonymous Muslims who believe that the community needs a space to express itself without shame or judgement
music
News
Who makes you happy?
happy listSend your nominations now for the Independent on Sunday Happy List
Life & Style
life
Have you tried new the Independent Digital Edition iPad app?
Independent Dating
and  

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

iJobs Job Widget
iJobs Money & Business

1st Line Helpdesk Engineer Apprentice

£150.00 per week: QA Apprenticeships: This company has been providing on site ...

Telesales & Sales Support Apprentice

£221.25 per week: QA Apprenticeships: This company is a well established Inter...

Client Relationship Manager - SQL, Python

£40000 - £50000 per annum: Harrington Starr: Client Relationship Manager - SQL...

**Financial Services Tax**

£35000 - £50000 per annum: Pro-Recruitment Group: Take your chance to join the...

Day In a Page

How I brokered a peace deal with Robert Mugabe: Roy Agyemang reveals the delicate diplomacy needed to get Zimbabwe’s President to sit down with the BBC

How I brokered a peace deal with Robert Mugabe

Roy Agyemang reveals the delicate diplomacy needed to get Zimbabwe’s President to sit down with the BBC
Video of British Muslims dancing to Pharrell Williams's hit Happy attacked as 'sinful'

British Muslims's Happy video attacked as 'sinful'

The four-minute clip by Honesty Policy has had more than 300,000 hits on YouTube
Church of England-raised Michael Williams describes the unexpected joys in learning about his family's Jewish faith

Michael Williams: Do as I do, not as I pray

Church of England-raised Williams describes the unexpected joys in learning about his family's Jewish faith
A History of the First World War in 100 moments: A visit to the Front Line by the Prime Minister's wife

A History of the First World War in 100 moments

A visit to the Front Line by the Prime Minister's wife
Comedian Jenny Collier: 'Sexism I experienced on stand-up circuit should be extinct'

Jenny Collier: 'Sexism on stand-up circuit should be extinct'

The comedian's appearance at a show on the eve of International Women's Day was cancelled because they had "too many women" on the bill
Cannes Film Festival: Ken Loach and Mike Leigh to fight it out for the Palme d'Or

Cannes Film Festival

Ken Loach and Mike Leigh to fight it out for the Palme d'Or
The concept album makes surprise top ten return with neolithic opus from Jethro Tull's Ian Anderson

The concept album makes surprise top ten return

Neolithic opus from Jethro Tull's Ian Anderson is unexpected success
Lichen is the surprise new ingredient on fine-dining menus, thanks to our love of Scandinavian and Indian cuisines

Lichen is surprise new ingredient on fine-dining menus

Emily Jupp discovers how it can give a unique, smoky flavour to our cooking
10 best baking books

10 best baking books

Planning a spot of baking this bank holiday weekend? From old favourites to new releases, here’s ten cookbooks for you
Jury still out on Manchester City boss Manuel Pellegrini

Jury still out on Pellegrini

Draw with Sunderland raises questions over Manchester City manager's ability to motivate and unify his players
Ben Stokes: 'Punching lockers isn't way forward'

Ben Stokes: 'Punching lockers isn't way forward'

The all-rounder has been hailed as future star after Ashes debut but incident in Caribbean added to doubts about discipline. Jon Culley meets a man looking to control his emotions
Mark Johnston: First £1 million jackpot spurs him on

Mark Johnston: First £1 million jackpot spurs him on

The most prize money ever at an All-Weather race day is up for grabs at Lingfield on Friday, and the record-breaking trainer tells Jon Freeman how times have changed
Ricky Gervais: 'People are waiting for me to fail. If you think it's awful, then just don't watch it'

Ricky Gervais: 'People are waiting for me to fail'

As the second series of his divisive sitcom 'Derek' hits screens, the comedian tells James Rampton why he'll never bow to the critics who habitually circle his work
Mad Men series 7, TV review: The suits are still sharp, but Don Draper has lost his edge

Mad Men returns for a final fling

The suits are still sharp, but Don Draper has lost his edge
Google finds a lift into space will never get off the ground as there is no material strong enough for a cable from Earth into orbit

Google finds a lift into space will never get off the ground

Technology giant’s scientists say there is no material strong enough for a cable from Earth into orbit