Bank seeks extra £50 billion to combat economic slump
Gary Duncan, Economics Editor
The Bank of England has asked the Chancellor to raise the limit to £50 billion on a scheme to jump-start the economy with massive injections of newly-created money.
In a move indicating a growing faith that recovery is now taking hold, the Bank fulfilled City speculation and put its radical campaign to combat the recession by “printing money” on at least a temporary hold.
But it left the door open for a return to the offensive later in the year, if economic news disappoints, and an upturn proves fragile or fails to appear.
If it does need to resume the ground-breaking “quantitative easing” (QE) strategy, the Bank may also be able to deploy extra firepower, having asked the Chancellor to raise his limit on the maximum scale of the scheme from an existing ceiling of £125 billion to £175 billion.
For now, the decision to halt the ground-breaking “quantitative easing” (QE) scheme came as the Bank’s rate-setting Monetary Policy Committee (MPC) also pegged interest rates at their 315-year low of just 0.5 per cent for a fifth month.
The moves came after the Bank said last week that it had completed the last of its existing planned total of £125 billion in purchases of government and corporate bonds through which it has been pumping the newly-created cash into the economy.
The noon verdict from the MPC ended weeks of uncertainty in the markets and among economists over its next move.
It shifts the Bank decisively into a “wait and see” stance while it gauges the impact of almost a year of drastic action, through rate cuts and QE, to tackle Britain’s biggest economic crisis since the Second World War.
Attention in the City and at Westminster will now be focused on the Bank’s latest assessment of Britain’s prospects, due to be unveiled next week by Mervyn King, its Governor.
Some City economists had predicted that the Bank would seek today to guarantee recovery by printing a further £25 billion of funds to buy-up still more bonds. That would have taken its spending under QE to a maximum of £150 billion set by the Chancellor in the spring.
Instead, the nine-member MPC opted to hold its fire for a third month in a row, ordering an extended pause in its battle against the slump, following a spate of recent signs that an upturn is emerging.
A key survey yesterday suggested that the services sector, the powerhouse of the economy, enjoyed its third consecutive month of growth during July, and its strongest expansion for 17 months, while the equivalent survey of manufacturing on Monday showed industry returning to growth for the first time in 16 months. Yesterday also saw official figures confirming an industrial fightback, with manufacturing output rising at the fastest pace since October 2007.
Hopes of economic revival have been further boosted by upbeat news from the high street and housing market. Official retail sales figures revealed a stronger than expected June rise, while the Nationwide Building Society found that house prices rose last month for the fourth time in five months.
Yesterday, the Halifax bank reinforced evidence of a housing market revival, reporting that house prices rose by 1.1 per cent in July, while the nation’s surveyors said that the housing crash was all but over.
However, the Bank’s decision still follows recent, grim GDP figures showing that the economy as a whole suffered another plunge in the second quarter, shrinking by 0.8 per cent, on the heels of the savage 2.4 per cent slump endured in the first three months of the year.
In halting its QE drive, the MPC spurned pleas from business leaders for further action, which became more vocal this week after the Bank’s own data revealed a record fall in lending to businesses in the second quarter, emphasising the danger that the corporate credit drought could throttle any recovery.
But critics of the contentious “money printing” scheme who have attacked it as ineffective or dangerous will welcome the Bank’s verdict.