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Bank resists more QE amid economic uncertainty

(Update) Quantitative easing scheme maintained at £325 billion as fears about inflation trump economic growth worries.

Bank resists more QE amid economic uncertainty

The Bank of England has put the brakes on its programme of economic aid, choosing not to extend its asset purchase scheme beyond the existing £325 billion as it waits for further clues about the fate of the UK economy. 

The base interest rate was maintained at 0.5%, a record low that has remained unchanged since March 2009.

The decision to halt the quantitative easing programme had been expected by the majority of City economists, though some had been calling for the nine-man monetary policy committee (MPC) to expand its bond-buying scheme by another £25 billion to see off the continuing economic headwinds.

Economists said that the MPC's decision showed that concerns about persistent inflation had trumped worries about the strength of the economy. 

Though falling from a September peak of 5.2%, consumer prices inflation proved 'sticky' in March when it came in at a higher-than-expected 3.5%. This led one member of the committee, Adam Posen, who had consistently voted for more QE, to change his vote at the MPC’s April meeting.

At the same time, the economy has flatlined. Data has been mixed but recent figures from the Office for National Statistics showed that the UK had fallen back into a double dip recession.

Philip Shaw, an economist at Investec, commented: 'The committee must either be feeling more optimistic than most over the economic outlook or seriously concerned that inflation will remain stuck over 2% for a long period, possibly a combination of both.'

The QE scheme, which mainly involves the purchase of UK government bonds (gilts) from pension funds and other institutions, has proved controversial, with doubts about its impact for the real economy.

Though the MPC has chosen not to extend its QE programme today, it could still opt to provide more support in the future.

'While QE2 has now had its last hurrah, we certainly would not rule out its later reintroduction as QE3,' said Nomura economist Philip Rush.

8 comments so far. Why not have your say?

Simon Ellis via mobile

May 10, 2012 at 05:48

The Bank of England continues to remain content to permit the rate of inflation to remain way above target. By allowing our currency to be corroded in such a pervasive manner long term damage to personal savings, business investment and social stability is being caused.

It is time that the members of the MPC remembered what their job is and become serious about controlling inflation by increasing interest rates.

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Peter Smith via mobile

May 10, 2012 at 06:33

The opportunity to monetize some more government debt will be a great temptation for the MPC.

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Dimitrios Philippelis

May 10, 2012 at 06:58

The term QE describes a monetary policy used by central banks to increase the supply of money by increasing the excess reserves of the banking system. But, they do not understand (the central bankers) how much bad are making to the consumers'/investors'/taxpayers' feeling and to the national economy. The worst of all is that citizens feel defrauded by politicians and bankers and a bankruptcy/default is ante portae.

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May 10, 2012 at 08:24

QE could have worked if the extra money that had been pumped into the economy had gone further than simply being used by the banks to pay off their gambling debts.

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May 10, 2012 at 13:22

There is always the stated reason and the real reason. QE raises inflation and monetizes government debt. These two facts are consistently denied by economists on the MPC..

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Tony Peterson

May 10, 2012 at 13:28

The Bank of England has ignored its mandate to control inflation.

It has instead let inflationary forces rip, to give double protection to the overborrowed borrow-to-buy-to-let clowns of the late noughties. It has allowed the prudent to be hammered to protect the profligate.

One cannot help but wonder what personal corruption fuels their actions. Especially given that their own pension fund was switched almost totally into index-linked gilts before the banking crisis began.

Another job for another Leveson perhaps.

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Georgio Kopaloadadis

May 10, 2012 at 14:09

I wonder how much effect Q.E. may have had, had it been such that the amount were used to envigorate new industries & technologies, such innovation creating an infrastructure promising jobs. It is probably excluded by some beauracratic EC rule, if so 'innovate' Mr Government, make it a guarrantee or a loan. Anything is better 'burning money' which is about the mark of Q.E. that erodes the value of our currency, savings, reserves, pensions & indirectly the value of all else i.e. property, and eventually life.

Fact is these higly educated, but not necessarilly intelligent so called financial luminaries, have no idea how to stop this, or a large part of the general public prepared to accept you cannot keep spending, what you don't have. Satis nunc?

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Truffle Hunter

May 10, 2012 at 14:58

Rather than QE government would be better to renew our national infrastructure eg nuclear power plants, railways and roads etc etc provided that they can show an inter-generational real rate of return above the cost of finance. If we go into debt we should at least leave good infrastructure to our children and grandchildren. Such projects could be funded on the international bond markets using existing £'s held by foreign entities, and if neccessary, part owned by the foreign entity. In the plight we find ourselves, this would at least generate some jobs and raise GDP for a while. The government should also insist on UK made inputs eg steel, rolling stock etc etc. If we dont have a rolling stock maker, we should insist on a foreign outfit setting up in the UK and enabling British workers to regain the skills. The same applies for other inputs needed for this national rebuilding plan.

As much as I hate to admit it as a free enterprise practitioner, this needs to come from the very top of government because the private sector as it exists could not cope. We need out of the box thinking to break the current spiral of despondency. The sort of debt we are incurring at the moment is for consumption by the welfare state. There is no rate of return for that.

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