Bank pledges further £50bn injection to boost recoveryFollow @PwC_Scotland
The Bank of England is to inject an additional £50bn into the UK economy over the next four months through a return to its quantitative easing (QE) programme.
This morning’s Monetary Policy Committee (MPC) meeting also voted to leave UK interest rates unchanged at the record low of 0.5%.
Also this morning, the European Central Bank cut its interest rate to 0.75% from 1%.
Commenting on the announcement, which brings the total of QE to £375bn since March 2009, Esmond Birnie, chief economist at PwC in Scotland and Northern Ireland, said:
"The decision to restart QE is not unexpected, but it is unlikely to be effective by itself in supporting economic growth and indeed may even hold back a much needed fall in inflation.
"With interest rates already extremely low, there are limits to the ability of monetary policy to counter the headwinds we are currently seeing from a weakening global economy and the euro crisis.
“The MPC should be focusing more strongly on ensuring inflation comes back down to target. This would ease the squeeze on consumers by boosting real disposable incomes and help to underpin recovery.
"To support economic growth, we need to look at other levers of policy. The "Funding for Lending” scheme and other measures announced in the Governor's Mansion House speech may help ease the blockages in the financial system.
“More emphasis is also needed from the government on supply-side measures which can support the longer-term competitiveness of the UK economy - such as reductions in business regulation, medium-term tax reform and a stronger programme of employment and training opportunities for young people."
About quantitative easing
On 5 March 2009, the MPC cut interest rates to 0.5% and embarked on a process of ‘quantitative easing’ (QE); the purchase of government securities to boost the UK money supply.
Quantitative Easing is a monetary policy used by central (national) banks to stimulate economic activity, whereby the Bank of England buys gilts and bonds, boosting the UK money supply so that banks have more cash to lend.
With fewer gilts in circulation, their price goes up. The more expensive they become, the less they yield and yield determines the long-term interest rates for overdrafts and business lending.
Low base rates, plus QE, equals more money in circulation and a real reduction in both short and long-term borrowing rates. Theoretically, this will reinflate bank reserves, increase the flow of lending and instil business and investment confidence.
Central banks look to QE when interest rates have already been lowered to near 0% levels but have failed to produce the desired effect. A risk attaching to QE is that, more money chasing a fixed volume of gilts and bonds may lead to higher prices and stimulate inflation.
Under its QE policy, the Bank of England initially committed to buy up to £75 billion of securities; this eventually rose to £200bn, with a further £75bn committed in October 2011.
A furthur£50bn investment on 9 February 2012 took cumulative QE to £325bn, with today’s announcement taking the total to £375b.