Bank of England shocks by pumping in an extra £50bn

The Bank clearly doesn't think we're out of the woods yet: it's ramping up quantitative easing to £175bn.

Last Updated: 31 Aug 2010

The Bank of England has voted to inject an extra £50bn into the economy via its quantitative easing programme – much to the surprise of many economists, who were expecting it to hold fire until we know how useful the first £125bn has been. This week we’ve seen various signs that the economy might be picking up, with encouraging figures from the services and manufacturing sectors, plus some slightly more cheerful results from big corporates. But judging by this decision, the Bank takes a much dimmer view of our economic prospects…

This latest extension to QE means the Bank will be pumping the staggeringly-large sum of £175bn into the economy, via asset purchases. For the last two months the MPC has opted to stick at £125bn, which led many economists to wonder if they planned to adopt a ‘wait and see’ policy for the time being – particularly since the most recent economic data seemed to suggest that we’re starting to pull out of recession (the National Institute of Economic and Social Research think-tank even suggested as much yesterday).

In its statement today, the Bank (which also voted to hold interest rates at 0.5%) admitted that ‘the pace of contraction has moderated, and business surveys suggest that the trough in output is close at hand.’ But it also pointed out that the UK recession ‘appears to have been deeper than previously thought’. Credit is clearly still a problem for businesses and consumers, and there’s no sign yet that QE has actually boosted the money supply to any great extent. So you can see why the Bank thinks more needs to be done - if only as a confidence-boost. Nonetheless, since it was expected to increase the programme to £150bn at most (any more than that needed specific permission from the Treasury), this does seem to be a fairly aggressive move.

It’s also a bit of an optimism-dampener. Since the MPC presumably knows a lot more about these things than we do – not least because they’ll have seen the Bank’s latest quarterly inflation report, due out next week – today’s decision also indicates that the economy’s true state is rather less healthy than this week’s figures have suggested. Given its main brief is to keep inflation in check, it wouldn’t be doing this unless it thought deflation was still a bigger concern for the forseeable future.

Then again, even the Bank admits that it’s still too early yet to tell whether QE is actually working. So there’s a degree of guesswork involved either way.

In today's bulletin:

Bank of England shocks by pumping in an extra £50bn
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Unilever's brands are back - but not P&G's
Carpetright turns it around as bed gamble pays off
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