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Economy to get extra £50bn boost Economy to get extra £50bn boost
(20 minutes later)
The Bank of England has kept interest rates on hold at 0.5% and announced that it will inject an extra £50bn into the UK economy.The Bank of England has kept interest rates on hold at 0.5% and announced that it will inject an extra £50bn into the UK economy.
With little room for rate cuts the Bank has been pumping money into the banking system through quantitative easing.With little room for rate cuts the Bank has been pumping money into the banking system through quantitative easing.
The process involves the Bank effectively printing money to buy government and corporate bonds.The process involves the Bank effectively printing money to buy government and corporate bonds.
It has spent about £54bn so far and is on track to spend £75bn by June. It will now extend its spending to £125bn.It has spent about £54bn so far and is on track to spend £75bn by June. It will now extend its spending to £125bn.
The Bank's statement acknowledged that "the world economy remains in deep recession", but added that, "surveys at home and abroad show promising signs that the pace of decline has begun to moderate".The Bank's statement acknowledged that "the world economy remains in deep recession", but added that, "surveys at home and abroad show promising signs that the pace of decline has begun to moderate".
Recent purchasing managers' indexes indicated that the pace of the downturn in the manufacturing sector had slowed by an unexpectedly large amount in April, while the service sector shrank at its slowest pace since last August.Recent purchasing managers' indexes indicated that the pace of the downturn in the manufacturing sector had slowed by an unexpectedly large amount in April, while the service sector shrank at its slowest pace since last August.
In addition, the Nationwide Building Society said earlier this week that UK consumer confidence had seen its biggest rise in two years last month.In addition, the Nationwide Building Society said earlier this week that UK consumer confidence had seen its biggest rise in two years last month.
The decision came shortly before the European Central Bank decided to cut its own interest rate from 1.25% to 1%. The Bank of England's decision came shortly before the European Central Bank decided to cut its own interest rate from 1.25% to 1%.
'Going to plan''Going to plan'
There has also been some surprise that the programme has only been extended to £125bn, given that the Treasury has said the Bank of England can spend up to £150bn on quantitative easing. There has been some surprise that the Bank's programme of quantitative easing has only been extended to £125bn, given that the Treasury has said the Bank can spend up to £150bn.
Stephanie Flanders, BBC economics editor Technically, they didn't need to make a decision on quantitative easing (QE) until next month.Stephanie Flanders, BBC economics editor Technically, they didn't need to make a decision on quantitative easing (QE) until next month.
Why act early? I suspect that they already knew they would be extending the programme, and thought it silly to wait another month to confirm that fact.Why act early? I suspect that they already knew they would be extending the programme, and thought it silly to wait another month to confirm that fact.
The evidence on QE to date has been mixed. We won't get a clear steer on how the Bank itself thinks things are going until next week's Inflation Report. But the message of today's decision is that the MPC thinks there's a lot more to do.The evidence on QE to date has been mixed. We won't get a clear steer on how the Bank itself thinks things are going until next week's Inflation Report. But the message of today's decision is that the MPC thinks there's a lot more to do.
There is nothing especially surprising in the statement itself, though note that the MPC has now joined those who see "promising signs that the pace of decline (in the UK) has begun to moderate." That said, "the timing and strength of... recovery is highly uncertain." No news there. Bank of England statement in fullThere is nothing especially surprising in the statement itself, though note that the MPC has now joined those who see "promising signs that the pace of decline (in the UK) has begun to moderate." That said, "the timing and strength of... recovery is highly uncertain." No news there. Bank of England statement in full
"It may suggest they're reassured that the recovery is going to plan," Alan Clarke, an economist at BNP Paribas told the BBC."It may suggest they're reassured that the recovery is going to plan," Alan Clarke, an economist at BNP Paribas told the BBC.
BBC economics editor Stephanie Flanders said she suspected the announcement had been made because the Bank already intended to extend the programme, and thought it unnecessary to wait another month to confirm it. However, BBC economics editor Stephanie Flanders said the message of the decision was that the Monetary Policy Committee (MPC) thinks there is a lot more to do.
There was also, however, a note of caution from the Institute of Directors. She said we would hear how well quantitative easing is working when the Bank of England releases its inflation report next week.
There was a note of caution from the Institute of Directors on the use of quantitative easing.
"The MPC is... right to extend its programme of asset purchases beyond the first £75bn, although they will wish to maintain their guard against the risks of overdosing on quantitative easing," its senior economist Peter Patterson said."The MPC is... right to extend its programme of asset purchases beyond the first £75bn, although they will wish to maintain their guard against the risks of overdosing on quantitative easing," its senior economist Peter Patterson said.
'Deep recession' Currency moves
The pound fell 0.37 cents against the US dollar to $1.51 and 0.67 cents against the euro to 1.13 euros after the announcement.The pound fell 0.37 cents against the US dollar to $1.51 and 0.67 cents against the euro to 1.13 euros after the announcement.
The rate at which banks lend money to each other, Libor, also fell.The rate at which banks lend money to each other, Libor, also fell.
The three-month Libor from the British Bankers' Association for dollars fell to 0.956% from 0.974% while the sterling rate fell to 1.428% from 1.431%.The three-month Libor from the British Bankers' Association for dollars fell to 0.956% from 0.974% while the sterling rate fell to 1.428% from 1.431%.
The Bank of England had not been expected to announce an extension of the programme until at least next Wednesday when its latest set of economic forecasts is scheduled to be published.