MercoPress. South Atlantic News Agency

Bank of England expands quantitative easing by £ 50 billion to £ 175 billion

The bank warns lending to business has fallen and spreads on bank loans remain elevated

The Bank of England on Friday held interest rates at 0.5% as expected, but expanded its quantitative easing program by £50 billion to £175 billion. In a letter to the chancellor Alistair Darling, Bank of England governor Mervyn King said the move was essential to meet the central bank’s long term inflation target of 2% or 1% either side.

Many market watchers had expected the Bank to halt its program, or to increase it only marginally, amid a wave of data that appears to show the UK pulling out of recession.

After the announcement sterling slumped against the Euro, falling to €1.700 from a previous one-month high of €1.1824. The FTSE 100, already up on the day, received a further boost from the news, climbing from around 4,685 to just short of the 4,700 mark ten minutes after the noon announcement.

The Bank is currently authorised to buy up to £150 billion of government debt, though it has so far purchased only £125 billion. The request to expand the program was immediately approved by the Chancellor. It expects to take a further three months to buy up the full £175 billion allocation, and will include longer maturity debt than under the current program.

In a statement accompanying Friday’s interest rate decision, the Bank warned against reading too much into recent positive indicators.

Banks were still repairing their balance sheets, it warned, which was in turn restricting credit for businesses and consumers, while “past falls in asset prices and high levels of debt may weigh on spending” moving forward.

“The recession appears to have been deeper than previously thought” the Bank said. “But the pace of contraction has moderated and business surveys suggest that the trough in output is close at hand. Underlying broad money growth has picked up since the end of last year but remains weak. And though there are signs that credit conditions may have started to ease, lending to business has fallen and spreads on bank loans remain elevated”.

“On the one hand, there is a considerable stimulus still working through from the easing in monetary and fiscal policy and the past depreciation of sterling” the statement said. “On the other hand, the need for banks to continue repairing their balance sheets is likely to restrict the availability of credit, and past falls in asset prices and high levels of debt may weigh on spending”.

“While some recovery in output growth is in prospect, the margin of spare capacity in the economy is likely to continue to grow for some while yet, bearing down on inflation in the medium term. But the recession and the restricted availability of credit are also likely to impact adversely on the supply capacity of the economy, moderating the increase in economic slack”.

The Bank said its decision to expand QE was essential to meet its medium term inflation target, and even held out the prospect of a further expansion of the program later in the year, promising to keep its scale “under review”.