FRESH DOUBTS about the strength of the economic recovery emerged in the UK yesterday after the Bank of England’s rate-setting committee surprised markets by voting to pump an extra £50 billion into the economy.
The bank’s monetary policy committee voted to extend its so- called quantitative easing programme of buying government and corporate bonds from £125 billion to an unexpectedly large £175 billion, while holding interest rates at 0.5 per cent.
The decision came despite an array of brighter economic data this week, with upbeat survey results suggesting that the economy was emerging from recession.
However, the central bank said the “recession appears to have been deeper than previously thought” in the UK, although it noted that the pace of contraction had moderated.
Sterling tumbled as investors scaled back expectations of recovery. The pound lost more than a cent against the dollar and almost as much against the euro in minutes and failed to recover. It traded at $1.677 against the dollar and at 85.5p against the euro in late London trade. Stocks rose as investors bet that the extra support would help the banks, while gilt yields fell in the belief that the extra funds signalled any interest rate rise was even further away than had been thought.
The European Central Bank also kept rates on hold as it made clear it had no intention of stepping up action to combat continental Europe’s recession.
ECB president Jean-Claude Trichet hinted strongly that the ECB forecast would be revised next month to show quarterly positive growth returning earlier than mid- 2010, as envisaged. “A flat level of growth” was possible this year, he said last night.
The Bank of England’s quantitative easing programme involves buying government and corporate bonds in a bid to boost the volume of cash in the economy. It is designed to stimulate spending, support bank lending and help return the economy to growth.
The policy committee had opted not to increase the asset purchases at its two previous meetings, leading to speculation that the programme of cash injections had run its course. – (Copyright The Financial Times Limited 2009)
