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Bank of England increases QE by £25bn

The Bank of England has increased the quantitative easing programme by £25bn to £200bn and has maintained bank base rate at 0.5 per cent for the eighth consecutive month.

This goes above the Chancellor’s authorised £175bn for the asset purchase programme and BoE governor Mervyn King (pictured) has written to Alistair Darling today to justify the decision.

King’s letter to Darling says: “On balance, the Committee believes that the prospect is for a slow recovery in the level of economic activity, so that a substantial margin of under-utilised resources persists. That will continue to bear down on inflation for some time to come, offset in the short run by the impact of the past depreciation of sterling.

“I am therefore requesting the authority to use the Asset Purchase Facility to purchase assets totalling £200 billion.”

The Bank said that although banks’ funding conditions have improved, financial conditions remain fragile and global activity as a whole remains depressed.

Output in the UK has fallen by almost 6 per cent since the start of 2008 and GDP continued to fall in the third quarter. But despite this, the BoE suggested that a pickup in economic activity may soon become apparent.

Schroders European Economist Azad Zangana says: “The market was expecting an additional £50bn in purchases and so the surprise has lifted Sterling and prompted a small sell-off in Gilts.
 
“The UK’s failure to exit recession in the third quarter will have swayed the monetary policy committee’s decision to extend QE, despite recent strong signs of activity from private business surveys and pick up in house prices.
 
“The MPC has been concerned that the need for household deleveraging and the banking system’s paralysis would lead to an unsustainable recovery once fiscal and monetary stimulus is withdrawn. Indeed the UK has been particularly prone to ‘double-dip’ recessions in the past. The Bank of England’s Inflation Report published next week will shed more light on current thinking.
 
“Nevertheless, we see this as a step too far and barring any major negative shocks in economic data, the Bank of England will enter a ‘wait and see’ period for the next few months before considering raising interest rates from the current emergency low levels.”

Legal & General mortgages director Ben Thompson says: “Rates kept low and more money pumped into the economy – no surprises there. But what would normally happen in a low interest rate environment is that the lending market would free up allowing people trade up, keeping the oils of the housing market turning.

“What we’ve actually got is an artificial, mini house price bump, which is not desirable. We’re therefore experiencing a temporary supply-led recovery but what we really want is a long-term demand-led recovery. We must learn the lessons from the past and facilitate a steady, controlled flow of credit in sensible way to the right people. Small, even house price increases are far better than big peaks and troughs.”

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