FRANKFURT (MarketWatch) — The Bank of England boosted the size of its asset-purchase program Thursday, prescribing a bigger dose of quantitative easing amid fears the British economy could stall out in the face of tighter credit conditions and the ongoing euro-zone debt crisis.
As expected, the nine-member Monetary Policy Committee said the bank would buy an additional 50 billion pounds ($79.2 billion) of assets, mostly British government bonds, bringing the total stock of purchases by the bank to £325 billion, or more than 20% of Britain’s annual gross domestic product.
Although recent business surveys pointed a more positive picture for the British economy, “the pace of expansion in the United Kingdom’s main export markets has also slowed and concerns remain about the indebtedness and competitiveness of some euro-area countries,” the bank said in a statement accompanying the announcement.
Falling inflation should help ease a squeeze on household real incomes, “but the drag from tight credit conditions” and ongoing austerity measures present a “headwind”, the bank said, warning that a weak outlook for near-term growth “means that a significant margin of economic slack is likely to persist.”
The MPC, as expected, left its key lending rate at a record low 0.5%, where it has stood since March 2009, when the bank first introduced its quantitative easing strategy.
The British pound
GBPUSD +0.03% traded at $1.5864 versus the dollar, up 0.4% from Wednesday.
The move comes as a pickup in some economic data has eased worries of an imminent recession, although growth is expected to remain weak at best, economists said. January purchasing managers indexes for both the manufacturing and services sectors showed unexpected improvement.
But overall economic fundamentals remain “on the whole fairly sour,” wrote economists at Rabobank International, while consumer price inflation has trended lower to a 4.2% annual rate. Although still well above the central bank’s 2% target, the rate is expected to continue falling sharply as comparisons with last year’s hike in the value-added tax drop out of the year-on-year calculations.
“With inflation plunging due to weak corporate pricing power, falling commodity prices and last year’s VAT hike dropping out of the annual comparison, the Bank of England has considerable room to step up its quantitative easing efforts even further,” said James Knightley, economist at ING Bank.
A 5% appreciation by the pound on a trade-weighted basis since July provides further rationale for more easing as the stronger currency will intensify trends of weak activity, rising unemployment and falling inflation, he said. ING expects the central bank to deliver a further £50 billion of quantitative easing in May, with the final size of the program likely to eventually swell to nearly £500 billion.
MPC members had access to the Bank of England’s quarterly inflation report, which will be released next week. It’s unlikely the report, which lays out the MPC’s economic projections, painted “a particularly optimistic picture of the near-term economic outlook” and likely projected inflation to fall below the 2% target over the bank’s two-year policy horizon, said Emily Nicol, an economist at Daiwa Capital Markets.
Under quantitative easing, the central bank electronically creates new money that is used to buy British government bonds, or gilts, from private investors such as banks, pension funds and insurers, with the hope the investors in turn will use the money to buy other assets, including corporate bonds and equities.
The aim, the bank says, is to lower longer-term borrowing costs and encourage the issuance of new equities and bonds.
William L. Watts is a reporter for MarketWatch in Frankfurt.
