The Bank of England’s Monetary Policy Committee (MPC) has decided to leave interest rates unchanged at 0.5% but, in a move that has come as a surprise to some, voted to inject a further £75 billion into the economy via the Quantitative Easing (QE) program.
The Bank’s QE program has already injected £200 billion into the economy and today’s announcement signals just how nervous the MPC is about the state of the UK economy. Just last month only one member of the committee voted for additional QE and even then for only an extra £50 billion, just a month later, at least five of the nine strong committee, have voted in favour.
Economic data
The MPC may have been persuaded of the need for more QE, the first time since 2009 that the measure has been used, after recent poor economic data.
The Office for National Statistics (ONS) this week revised their growth figures for the period April to June downwards, showing that the economy grew by just 0.1%, less than previously thought.
In a statement released today the Bank said: “In the United Kingdom, the path of output has been affected by a number of temporary factors, but the available indicators suggest that the underlying rate of growth has also moderated.”
The statement continued: “The deterioration in the outlook has made it more likely that inflation will undershoot the 2% target in the medium term.”
“In the light of that shift in the balance of risks, and in order to keep inflation on track to meet the target over the medium term, the committee judged that it was necessary to inject further monetary stimulus into the economy.”
QE is seen by many as an inflationary measure and it is possible that the MPC have been convinced that with inflation “undershooting in the medium term” and the poor growth figures, that now was the time to introduce additional QE measures.
Jeremy Batstone-Carr, chief economist at Charles Stanley agrees, he said” The increased scale of the programme is a direct reflection of the deterioration in the UK economy.”
He continued “It also reflects the Bank’s view that a large amount of QE is required to make a difference to both the real and nominal GDP growth, given the impaired nature of the banking system.”
Reaction
Both the British Chambers of Commerce and the CBI welcomed the move, although cautioned that it needed to be part of a package of measures and was likely to have little impact in isolation.
Ian McCafferty, chief economic adviser at the CBI, said: “This measure will help support confidence, but we need to recognise that its impact on near term growth prospects is likely to be relatively modest.”
He continued “Only once the turmoil in the eurozone is resolved will confidence be fully restored.”
David Kern, chief economist at the BCC, said: “Higher QE on its own is not enough and we urge the MPC to look at other radical methods. There is a strong case for the MPC to help boost bank lending to businesses by immediately raising its purchases of private sector assets.”
Interest rates
The decision to inject more money into the economy is likely to mask the fact that interest rates have remained at 0.5%.
This is good news for people on tracker or variable rate mortgages but bad news for savers as they struggle to get a real return on their savings, a problem which will only get worse if this latest round of QE causes inflation to rise even further.
