MPC ramps up stimulus fund by £25bn as it keeps base rate on ice
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The Bank of England’s Monetary Policy Committee has decided to expand its quantitative easing budget to £200bn, while keeping the base rate on hold.
As of 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 budget was originally set at £75bn in March. This was increased to £125bn in May and boosted to £175bn in August. Meanwhile, interest rates have been kept at 0.5% since March.
Following last Thursday’s MPC meeting Bank governor Mervyn King and Darling exchanged letters about the expansion of the quantitative easing programme, also known as the Asset Purchase Facility.
In a letter to Darling, King says: “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.”
Paul Hunt, managing director of Phoebus, thinks the Bank had to expand the programme because the two mechanisms by which it believed it could increase the supply of affordable credit have not worked.
Hunt says: “The first mecha-nism was reducing interest rates, which stopped working long ago. The second was the original quantitative easing programme. The fact the Bank has expanded this suggests it has not worked yet, or at least not on the scale it hoped for.
“The £175bn allotted in August has ended up on lenders’ balance sheets rather than being lent to businesses or consumers.”
He adds: “The cash injection has certainly arrested the fall in house prices which has done wonders for lenders’ impairment profiles, but it has not got money flowing through the economy.”
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