Author: By Russell Lynch, Press Association
The Monetary Policy Committee (MPC) voted to hold interest rates at their
record low of 0.5 per cent but increased the scale of its programme to boost
the money supply, by £50bn to £175bn.
The MPC’s decision to expand quantitative easing (QE) underlines the caution
among policymakers over the strength of the UK’s recovery from recession
despite recent positive signs.
Economists expect the UK to return to growth between July and September but
problems in the banking sector could still restrain a recovery, and official
estimates showed a disappointing 0.8 per cent fall in output during the
second quarter of this year.
In a statement explaining the surprise move, the Bank said the recession “appears
to have been deeper than previously thought”.
While the pace of decline has slowed and business surveys suggested the low
point in activity was “close at hand”, money growth remains weak,
the Bank said.
“Though there are signs that credit conditions may have started to ease,
lending to business has fallen and spreads on bank loans remain elevated,”
The Bank said: “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.”
It added: “While some recovery in output growth is in prospect, the
margin of spare capacity in the economy is likely to continue to grow for
some while yet, bearing down on inflation in the medium term.”
In an exchange of letters with Bank Governor Mervyn King, Chancellor Alistair
Darling agreed to increase the QE threshold to £175bn.
Richard Lambert, director-general of the CBI business group, said: “This
must have been a finely balanced decision. The economic outlook has
brightened a little in recent weeks, which might have argued for a pause in
“But the MPC has been crunching the numbers for its quarterly inflation
report, and must have concluded that a further policy stimulus was necessary.”
Corin Taylor, senior policy adviser at the Institute of Directors, added: “The
recession is not over yet, but it would be better for the MPC to call a halt
once QE has expanded to £150bn.
“The risk of inflation further out means that some caution is still
necessary. Right now the economy needs all the monetary support it can get,
but at some point QE will have to be reversed, and the MPC should not
The committee is charged with keeping Consumer Price Index inflation at 2 per
cent and its decision will have been made with reference to the Bank’s
latest forecasts, which are published next week.
CPI fell below the 2 per cent target for the first time in almost two years in
June at 1.8 per cent but is expected to fall further still and today’s move
suggests a much bigger push is needed to get it back to the target.
Alongside brighter economic signs, the MPC weighed up a record £14.7bn fall in
lending to businesses between April and June.
The committee’s caution underlines how a weak banking sector could yet weigh
on recovery despite £6bn in combined profits from HSBC and Barclays on
Monday. Lloyds Banking Group and nationalised Northern Rock have reported
losses of £4bn and £724 million respectively.
According to official estimates, the UK economy has now shrunk by 5.7 per cent
since the first quarter of 2008.
This is more than double the depth of the early 1990s recession and
approaching the level of the slump seen in the early 1980s.
View full article here
Author: Ezine Article BoardThis author has published 5774 articles so far.