Bank boosts quantitative easing by £25bn

5 November 2009 | By Natalie Thomas

As at October 29 the Bank had spent £174.81bn buying up assets to stimulate the economy, practically maxing out its £175bn limit agreed with chancellor Alistair Darling.

The MPC said in October that it expected its quantitative easing programme to take another month to complete.

The quantitative easing budget was originally set at £75bn in March, which was increased to £125bn in May and boosted further to £175bn in August.

Meanwhile interest rates have been kept at 0.5% since March.

Following today’s meeting of the MPC, the Bank governor Mervyn King and chancellor Alistair Darling exchanged letters about the expansion of the quantitative easing programme, otherwise known as the Asset Purchase Facility.

King told the chancellor: “The world economy has shown signs of recovery, with a number of emerging market economies experiencing a strong rebound in growth, although global activity as a whole remains significantly depressed.

“Asset prices have risen internationally since the spring, reflecting both the gradual improvement in the economic
climate and accommodative monetary policies.

“And banks’ funding conditions have improved, though financial conditions remain fragile.”

Recent figures from the Office for National Statistics showed that the UK economy had contracted 0.4% in Q3, leading some commentators to speculate that the Bank needed to do more to bring the UK in line with the progress of other major economies.

The US has already emerged from recession as it recorded an annual growth rate of 3.5% in Q3.

Ben Thompson, director of mortgages at Legal & General, 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.”

Thompson argues that the UK is experiencing a temporary supply-led recovery rather than a long-term demand-led recovery.

He adds: “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.”

Jonathan Cornell, head of communications at First Action Finance, says: “The MPC has decided to expand the programme by £25bn taking the total to an eye watering £200bn, that’s 2 with 11 zero’s after it.

“To put it into context that’s more than the entire gross domestic product of Greece, the worlds 27th largest economy.”

He adds: “Some experts are querying whether or not the scheme is actually increasing lending across the economy as banks seem to be using the money to build up their balance sheets rather than lending it out to individuals and businesses.

“Banks argue that they are doing all they can to increase lending but the limited supply of lenders means that banks can cherry pick who they lend to and what they charge them.”

But Cornell also says that while swap rates used to fund fixed rate deals have crept up in the past two weeks there is still scope for lenders to cut their fixed and tracker ranges.

 

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