The Bank of England increased its quantitative easing programme by £25bn to £200bn, which goes beyond Chancellor Alistair Darling’s authorised threshold for the scheme.
The monetary policy committee voted to keep bank rate at 0.5 per cent for the eighth consecutive month at its mon- thly meeting last week.
The bank said although banks’ funding conditions have improved, financial conditions remain fragile and global activity as a whole remains depressed.
BoE governor Mervyn King wrote to the Chancellor to justify the decision to extend the asset purchase facility. King’s letter 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 £200bn.”
UK output has fallen by almost 6 per cent since the start of 2008 and GDP continued to fall in the third quarter but the BoE suggests that a pickup in economic activity may soon become apparent.
Exact Mortgage Experts managing director Alan Cleary says: “Were they right? It is tricky to judge if QE has worked. Another option would have been to reduce interest rates further, at 0.5 per cent banks are simply shoring up their capital. A cut to 0.25 or even 0 per cent would encourage banks to expand their balance sheets. The MPC have not seen it that way.
“The latest stimulus should be injected via corporate bonds rather than gilts. That would inject money directly into the system rather than seeing it getting stuck in the banks.”
Liberal Democrat Shadow Chancellor Vince Cable says: “We support the principle of quantitative easing but it is clear that, as banks continue to hoard liquidity, this money is not feeding through to the wider economy. There is now a danger that we are simply throwing more and more money at a problem, with little evidence that it is having any positive impact beyond the financial sector.”