The Bank of England decided Thursday to pump out another £50 billion of stimulus cash, in a bid to haul Britain out of recession and ward off contagion from the eurozone sovereign debt crisis. The central bank said in a statement that its nine-member Monetary Policy Committee had voted to increase its asset purchase programme, known as quantitative easing (QE), by the equivalent of $78 billion or 62 billion euros.
---- Bank keeps interest rates at record low
The bank announced that it will hike its QE stimulus policy to a total of £375 billion over the next four months, following the conclusion of its latest monthly meeting. The BoE also kept its main interest rate at a record low 0.50 percent. Both announcements had been expected by traders, resulting in muted reaction for both sterling and London share prices.
"Britain's central bankers are worried that the UK economy may be pushed into a new credit crunch and a deeper recession due to the eurozone's worsening problems," said economist Melanie Bowler at Moody's Analytics, a sister company to the ratings agency Moody's.
"The Continent's debt crisis threatens to spill across the Channel via Britain's strong trade and financial links with the region. With the UK government committed to austerity, monetary policy is the only tool available to bolster the economy." Shortly afterwards, the European Central Bank stripped back its key interest rate to a new record low of 0.75 percent in a concerted attempt to help the eurozone weather the region's long-running debt crisis. Explaining the reasons for its own policy decisions, the BoE noted on Thursday that the British economy was struggling.
"UK output has barely grown for a year and a half and is estimated to have fallen in both of the past two quarters," it said. "The pace of expansion in most of the United Kingdom's main export markets also appears to have slowed. Business indicators point to a continuation of that weakness in the near term, both at home and abroad." The bank added that "concerns remain about the indebtedness and competitiveness of several euro-area economies, and that is weighing on confidence here" in Britain.
Though not a member of the eurozone, Britain relies heavily on the area for the day-to-day trading of its goods and services. The Monetary Policy Committee had pumped up the economy with £325 billion under its QE stimulus policy since March 2009, when it also slashed its key rate to the current all-time low. Under QE, the BoE creates new cash to purchase assets such as government and corporate bonds with the aim of boosting lending and economic output.
Britain's recession is meanwhile deeper than initially thought after data last week showed the economy shrank 0.3 percent in the first quarter after a higher-than-expected 0.4-percent contraction in late 2011. A recession is defined as two quarters running of contraction.
Despite QE, Britain's main banks have been reluctant to lend to businesses and individuals as banks seek to repair their balance sheets, forcing the BoE to take more direct action. The BoE last month loaned banks £5.0 billion in the first use of a facility to shield Britain's financial system from the eurozone debt crisis. It allotted the full amount on offer for six-month loans with an interest rate of 0.75 percent, under the central bank's Extended Collateral Term Repo Facility (ECTR).
The BoE, along with the British government, also intends to shortly launch a "funding for lending" scheme - lasting several years - that would offer cheap loans to banks in exchange for a wide range of collateral and on the condition that they increased lending to small businesses. Reports said that about £80 billion would be made available under the scheme. The BoE's main task is to use monetary policy as a tool to keep annual inflation close to a target of 2.0 percent. British 12-month inflation fell to 2.8 percent in May - the lowest level for more than two years.
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