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Economy to get extra £50bn boost Economy to get extra £50bn boost
(40 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". According to the BBC's economics editor Stephanie Flanders, the evidence to date on whether the policy has been helping the financial system has been mixed.
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. The Bank's statements on the current state of the economy were equally so.
In addition, the Nationwide Building Society said earlier this week that UK consumer confidence had seen its biggest rise in two years last month. It 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 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 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. City economists suggested it may be a hopeful sign 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.
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. However, there was a note of caution from the Institute of Directors on the use of quantitative easing.
She said we would hear how well quantitative easing is working when the Bank of England releases its inflation report next week. "The [Bank of England's Monetary Policy Committee] 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.
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.
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's decision on interest rates came shortly before the European Central Bank decided to cut its own interest rate from 1.25% to 1%.
Signs of improvement?
Figures released last month showed that the UK economy shrank by 1.9% in the first three months of 2009, the biggest three-month decline in GDP since the third quarter of 1979.
And the latest unemployment figures showed the number of people out of work in the UK rose by another 177,000 to 2.1 million between December and February.
However, recent surveys appear to have indicated that the pace of the downturn is slowing.
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.
There are also signs that the mortgage market may be starting to revive, with figures indicating that the number of mortgage products on offer is rising, and that lenders are starting to accept smaller deposits from house buyers.
The official measure of inflation - the Consumer Prices Index (CPI) - fell to 2.9% in March, while the Retail Prices Index (RPI) measure dropped to -0.4%, the first time it has been negative since 1960.
While the CPI measure remains above the 2% target, the Bank said it was likely to drop below this level later this year, partly as a result of lower food and energy prices.