UK pumps $125b more into economy

The "fragile" state of financial conditions in Britain and the continuing shortage of lending by the banks were cited by the Bank of England as its reasons for a substantial expansion in its policy of quantitative easing.

A further £50 billion ($125 billion) of "QE", which is likened to printing money, was authorised by the Chancellor, Alistair Darling, yesterday, a clear signal that the authorities remain concerned about the speed and strength of a recovery, despite better news in recent days on the property market, manufacturing output and business confidence.

About £125 billion has already been pumped into the economy since the policy was launched in March. Most has been spent buying gilts, with smaller amounts devoted to the commercial paper and corporate bonds market.

In his letter to the chancellor, the governor of the bank, Mervyn King, wrote: "The future evolution of output and inflation will be determined by the balance of two sets of forces. On the one hand, there is a considerable stimulus still working through from the easing in monetary and fiscal policy and the past depreciation of sterling. On the other hand, 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."

The bank's monetary policy committee also announced it would keep interest rates at 0.5 per cent. Some analysts were surprised by the news of the additional QE, and the pound fell sharply after the announcement.

Almost all of the City's economists have spent the past few weeks reading radically different interpretations into the public utterances made by members of the committee, which reflected an unusually large uncertainty about where the bank's thinking was heading. Nonetheless, most welcomed the move.

While the consensus is that Britain will return to growth in this quarter, the dangers of a "relapse" or "double dip" are strong. Richard Snook, of forecasters CEBR, said: "The impact of rising unemployment and the inevitable fiscal contraction in 2010 means that strong monetary stimulus is needed to prevent a fragile recovery turning into a double-dip recession."

In his letter responding to the bank, Darling said he welcomed the consultation into the policy being extended to supply chain finance, as business wants.

Critics have argued that the subdued growth in the money supply and lending means that the banks have been "sitting" on the extra cash and refusing to lend it as they rebuild their capital, though that very sluggishness is perhaps a reason to intensify the policy.

Others point to the way that QE has bid up the price of gilts, depressing their yield and attractiveness to investors and thus helping revive equity and corporate bonds markets - important sources of alternative finance for larger firms. That could leave more finance for smaller firms and homebuyers.

- INDEPENDENT