The FINANCIAL -- The Bank of England Thursday said it will buy another GBP50
billion of U.K. government bonds with freshly-created money in an effort
to shore up the fragile economy.
According to Borsa Italiana - London Stock Exchange Group, the central bank said its rate-setting Monetary Policy Committee voted to expand its program of quantitative easing to take the total scale of its stimulus efforts to GBP325 billion when the latest batch of purchases is complete.
In a statement, the BOE said it will keep the size of the stimulus program under review. But recent data and surveys suggest that the economy has begun to stabilize after a contraction in the final quarter of 2011, and the U.K. may avoid a recession that would justify another round of bond purchases in May.
Much will depend on the euro zone's fiscal crisis, however, and a further worsening of the economic outlook in the U.K.'s main export market, combined with added strains on bank funding, could trigger further action by the BOE.
The bank justified loosening policy further on the basis that its latest forecasts indicate inflation will slow sharply in 2012.
"The committee judged that the weak near-term growth outlook and associated downward pressure from economic slack meant that, without further monetary stimulus, it was more likely than not that inflation would undershoot the 2% target in the medium term," the BOE said in a statement.
The committee left the central bank's key interest rate unchanged at a record low of 0.5%, where it has stayed since March 2009.
The latest batch of asset purchases will be completed in April. The central bank tweaked the maturities of the bonds it will buy under the program, concentrating more on short-date issues.
The outcome was expected by economists polled by Dow Jones Newswires.
The U.K. economy is struggling to expand in the face of government spending cuts, weak consumer spending and the fallout from the sovereign debt crisis gripping the neighboring euro zone. Bank lending is weak and the money supply has been shrinking.
"The drag from tight credit conditions and the fiscal consolidation together present a headwind," the MPC said. "The correspondingly weak outlook for near-term output growth means that a significant margin of economic slack is likely to persist."
The economy contracted in the final quarter of 2011, and although upbeat business surveys and some better-than-expected data on December trade and production have lessened the risk of a renewed recession, it is nonetheless expected to perform poorly in 2012. Independent forecasts collected in January by the U.K. finance ministry indicate that economists on average expect the economy to expand just 0.4% this year.
"Even though there are tentative signs that the economy is stabilising, the outlook is still highly uncertain," said Ian McCafferty, chief economic adviser to the Confederation of British Industry. "This new round of QE should help support confidence, though the direct stimulus to near-term growth is likely to be limited."
The additional central bank stimulus comes against a background of high yet slowing inflation. The annual rate of inflation slowed to 4.2% in December from 4.8% in November, but remained well above the central bank's 2% target.
Since the financial crisis took hold in 2007, central banks around the world have slashed interest rates to near-zero and expanded their balance sheets in a sometimes-concerted effort to stave off collapse. More recent efforts by the European Central Bank and others have focused on thawing frozen bank funding markets with unlimited cheap loans for commercial banks. Speculation persists the U.S. Federal Reserve may yet revive its own quantitative easing program to secure a fledgling recovery, despite better-than-expected labor market data in January.
Investors will be seeking clues to the future path of U.K. monetary policy, and the likelihood of further stimulus, when Governor Mervyn King presents the central bank's latest forecasts for inflation and economic growth Feb. 15.
In its statement, the MPC said that recent business surveys "have painted a more positive picture and asset prices have risen" and said it foresees "a gradual strengthening of output growth later this year."
But it added that concerns remain about the outlook for the euro-zone economy.
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