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Quantitative easing to expand by £25bn

The Bank of England’s Monetary Policy Committee has just confirmed that Bank Rate will remain at 0.5%, as it has since early March this year. However, the MPC decided to extend its asset purchase programme to the tune of an additional £25bn, to reach a total of £200bn.

 

The Committee set the scene by noting that output has fallen by almost 6% since the beginning of 2008. Household spending is down and investment by businesses has fallen sharply, although there are some signs that economic activity is picking up.

 

In the medium term they note two opposing forces on the UK economy. On the one hand the substantial easing of both fiscal and monetary policy is still working its way through the economy. They noted that the level of quantitative easing thus far has helped to boost asset prices and improve access to capital markets. However, on the other hand, banks are continuing to repair their balance sheets which is likely to limit the availability of credit.

 

Interest rates on hold and asset purchase scheme expanded.

Interest rates on hold and asset purchase scheme expanded.

They believe the recovery will be slow and that the margin of under-utilised resources will keep inflation in check, although this will be partly offset by the previous depreciation in the sterling exchange rate.

 

The Bank has opted for an increased level of asset purchases because of the slow growth in the measure of broad money. In fact, the M4 measure, excluding other financial corporations, has recently shown a surprising drop in the rate of growth instead of the rise that might have been expected from the Bank’s actions. Does this mean that the quantitative easing scheme is not working? The Bank argues that it does not although it has no real proof. The argument is that broad money growth would be even slower if not for the £175bn injected already through the asset purchase scheme and that capital markets would be even more constrained. The Bank obviously believes that the injection of another £25bn will not have an inflationary effect in the short term because of the size of the output gap.

 

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Posted in Bank of England, Inflation, Interest rates, Monetary Policy Committee, Money Supply

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