Bank Of England Injects £50bn Quantitative Easing Boost To Economy

Bank Of England Injects £50bn Quantitative Easing Boost To Economy

The Bank of England injected a further £50 billion into the economy today as the UK battles to stave off another recession.

The Bank's Monetary Policy Committee (MPC) voted to increase the quantitative easing (QE) programme - effectively printing more cash - from £275 billion to £325 billion despite the risks it poses to the country's inflation rate. Meanwhile, it held interest rates at a record low of 0.5%.

The move will draw criticism from pensioners' groups who have warned that further QE could leave more than a million pensioners "permanently poorer for the rest of their lives" due to the adverse effect money-printing has on annuity rates.

But business leaders said further stimulus would "support confidence" and welcomed the decision.

The boost comes amid mixed signs for the economy as surprisingly upbeat industry surveys for January conflicted with a downgraded growth forecast from think-tank Niesr, while economists warned of the potentially damaging impact of recent extreme weather.

Explaining the move, the Bank said that while recent business surveys have "painted a more positive picture", the pace of expansion in the eurozone - the UK's main export market - has slowed and "concerns remain" about the region's debt levels.

The Bank said that tight credit conditions and the Government's austerity measures present headwinds looking ahead, while inflation, which dropped to 4.2% in December, should continue to fall sharply in the near term.

The Government and the Bank have both placed much of the blame for the UK's economic difficulties on the troubles in the eurozone, which still have no clear resolution.

But the MPC held fire on boosting QE in recent months as it waited for the last round of asset purchases, unveiled in October, to be completed.

The Bank said the £50 billion boost unleashed today would take three months to complete.

In a letter authorising the boost, Chancellor George Osborne said he agreed that an increase in the asset purchase ceiling would "provide the MPC with the scope to meet its inflation target".

But pensioners' groups have highlighted the difficulties such policy action can cause for retirees.

Annuity investors have seen rates plummet in recent years, as pensioners have faced a "perfect storm" of high living costs and low returns on their savings.

QE makes it cheaper for companies to borrow by pushing down the yield on government bonds, but annuity incomes are also based on these yields, meaning new pensioners see their incomes reduced.

The policy also has an impact on inflation, meaning pensioners can face higher living costs.

Ros Altmann, director-general of Saga, said the "short-term stimulus" of QE has "very dangerous long-term consequences".

She said: "Around half a million annuities are sold each year and, since 2008, annuity rates have fallen by about 25%, most of which is due to the effect of QE.

"That means over a million pensioners will be permanently poorer for the rest of their lives, as they have bought an annuity at rates that have been artificially depressed by the Bank of England."

But the move was welcomed by David Kern, chief economist at the British Chambers of Commerce (BCC).

He said: "Although the benefits are not immediately obvious to the business community, quantitative easing plays a key role in strengthening the financial system and stabilising the wider economy."

TUC general secretary Brendan Barber said the decision was the "right thing to do, given the weak state of our economy".

He added: "But more needs to be done to ensure that this latest injection of cash actually reaches the businesses that need it, rather than just gathering dust on banks' balance sheets."

The closely-watched Markit/CIPS surveys showed that the manufacturing sector returned to growth in January, while the powerhouse services sector saw a record leap in optimism.

Despite the upbeat data, most analysts insisted it was still too early to call a recovery after respected thinktank NIESR warned recently that the UK economy would shrink by 0.1% in 2012 amid weak investment and uncertain conditions.

Meanwhile, recent extreme weather has clouded the picture further, with some economists warning that the heavy snowfall and icy conditions could hit economic output, as they did at the turn of the year in 2011.

The economy contracted by 0.2% in the final quarter of 2011, sparking fears that the UK would fall back into another recession - defined as two successive quarters of falls - albeit a much milder one than previously.

Howard Archer, chief UK and European economist at IHS Global Insight, said there were "compelling reasons" for the Bank to deliver further economic support.

He said: "It is far from certain that January's apparent pick-up in economic activity can be sustained and relapses remain a very real risk given still appreciable domestic and international - mainly eurozone - headwinds."

Shadow chancellor Ed Balls said: "The Bank of England is doing all it can to try and boost our flatlining economy, but it can't perform miracles.

"Simply printing more money cannot offset the contractionary effects of George Osborne's tax rises and spending cuts that go too far and too fast - a 'drag' on growth that the Governor of the Bank of England acknowledges in his letter today.

"With interest rates at record lows and confidence depressed, there is only so much a further loosening of monetary policy can do. After all, since the last round of quantitative easing was announced in October our economy has gone into reverse.

"Three years ago George Osborne said that quantitative easing was the last resort of desperate governments. He is now desperately hoping it will bail out his failing economic policy.

"But with unemployment soaring and £158 billion more borrowing than planned, what we desperately need is a change of course and Labour's five-point plan for jobs and growth to get our economy moving again and so get the deficit down."

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