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Additional £50 billion of QE for UK economy
6 July 2012
The Bank of England's Monetary Policy Committee (MPC) has voted to inject a further £50 billion into the economy over the next four months through its quantitative easing (QE) scheme.
The total level of QE - the buying of gilts designed to kick-start the economy - now sits at £375 billion.
The MPC also voted to maintain the official base rate at its record low of 0.5 per cent.
It explained its decision would 'sustain a gradual strengthening' to the economy against slowing growth in UK output and the double dip recession.
It added that business indicators pointed to a continuation of weakness in the near term and that ongoing concerns about the Eurozone crisis continued to weigh on business and investor confidence in the UK.
According to the Bank, tightening credit conditions and tensions within the euro area would see inflation fall below its target rate of two per cent without further QE. Inflation in the UK stands at 2.8 per cent in May, down from its peak of 5.2 per cent in September.
It also said that the Government's Funding for Lending Scheme, a package worth up to £100 billion to support the flow of credit to the public and businesses, would be a welcome initiative.
The additional QE was widely expected following last month's MPC meeting, when four of its nine members voted to increase it.
The British Chambers of Commerce's (BCC) chief economist, David Kern, commented that the increase in QE would have 'only marginal benefits to the real economy.'
"While the increase in QE may produce some modest benefits, the policy is not risk-free, and could be counter-productive," he said.
"It may limit the decline in inflation in the long term, at a time when we need falling inflation to underpin real incomes and boost demand in the UK economy. QE was the right response in earlier years, but at the present time its benefits for the real economy are at best likely to be marginal."
The BCC urged the Government to press ahead with new lending and liquidity schemes and initiate moves towards the creation of a business bank.
Meanwhile, both the European Central Bank (ECB) and China also cut interest rates, with the ECB cutting its rate to a historic low of 0.75 per cent.
As reported in the Financial Times, Mario Draghi, ECB president, said that 'weakening of growth' was occurring across the whole of the euro area, although decisions to reduce interest rates around the world were 'not co-ordinated.'