Bank of England at crossroad on stimulus program despite weaker economy
The Bank of England has decided not to extend its quantitative easing (QE) stimulus program, which has injected £375bn into the UK financial system.
Under QE, the Bank creates money and uses it to buy government bonds to try to stimulate the economy. The Bank's Monetary Policy Committee (MPC) also decided to keep interest rates at 0.5%, the record low they have been held at since March 2009.
The UK came out of recession recently, growing 1% between July and September. The strong rebound, which was helped by tourist spending during the Summer Olympics, followed nine months of modest economic contraction.
However, recent data suggests the economy remains finely balanced between growth and recession. Retail sales were revealed last month to have fallen a faster-than-expected 0.8% in October.
Moreover, on Wednesday, the independent forecasting body the Office for Budget Responsibility cut its forecast for growth in the UK economy for this year and every year up until 2016. It now expects the economy to shrink by 0.1% this year.
Some economists have questioned the effectiveness of the Bank's QE policy, suggesting that it does little more than replace one low-risk asset on banks' balance sheets - government debt - with another even lower-risk asset - a deposit at the Bank of England - and has failed to induce the banks to lend more.
In response, the Bank has instituted the Funding for Lending scheme, which aims to subsidise lending by banks to businesses and households, and which came into operation earlier this year.
Another reason for the Bank to pause on QE was provided by the most recent consumer prices data, which showed inflation jumping unexpectedly to 2.7% in October, compared with a 2.2% rate the month before.
The brief release said that the “Bank of England’s Monetary Policy Committee today voted to maintain the official Bank Rate paid on commercial bank reserves at 0.5%. The Committee also voted to maintain the stock of asset purchases financed by the issuance of central bank reserves at £375 billion”. The minutes of the meeting will be published at 9.30am on Wednesday 19 December”.