Bank of england buys bonds
Printing money
The Bank of England yesterday stepped up its aggressive campaign to end Britain’s economic slump by ordering a surprise £50 billion expansion of its radical scheme to jump-start growth by “printing money”.
Much of the City was wrong-footed as the Bank announced that it would immediately increase the size of its drive to pump extra cash through the economy by buying government and corporate bonds.
The unexpected move will add to the Bank’s purchases so far of £46 billion of government bonds, or gilts, and corporate debt using newly created money under the £75 billion first phase of its radical “quantitative easing” scheme. It said that it would now raise the total to be spent under the plan to £125 billion.
The Bank added that the measures would run for a further three months, beyond the first phase that was due to end at the end of this month, extending the unprecedented action until the end of August.
The verdict from the Bank’s Monetary Policy Committee (MPC) came as it also held official interest rates at their present record low of 0.5 per cent for a second successive month.
The MPC’s decision to increase its operation to print money and buy assets brought forward a move that had already been widely tipped by experts to come next month.
However, the move sparked immediate nervousness that the Bank may now expect the already savage slump in the economy to be deeper and longer than it has already predicted. Mervyn King, the Bank’s Governor, is due to unveil the MPC’s latest forecasts of Britain’s prospects next week.
Hopes that an eventual recovery is emerging and that the worst phase of the recession has passed have risen in recent weeks after a flurry of more positive news suggesting that the pace of decline is beginning to ease.
However, persistent fears about the outlook grew last month after official figures revealed that GDP plummeted in this year’s first quarter, shrinking at a headlong rate of 1.9 per cent.
The MPC’s decision to take extra action to breathe life into the economy emphasises the continued uncertainty, which the Bank highlighted in its statement. It acknowledged “promising signs that the pace of decline has begun to moderate” but emphasised that the world economy remains in deep recession, with world output falling and global trade dropping precipitously.
The Bank said that the economy was caught between conflicting forces. On the one hand, the slump was being aggravated as debt-laden households, businesses and banks strove to bolster their finances by cutting spending and saving more. However, pulling in the opposite direction were far-reaching steps by central banks, including the Bank of England, and governments around the world to kick-start growth through lower interest rates, “quantitative easing” and tax and spending measures.
The MPC said that the stimulus put in place by the Bank, the Government and other countries should “in due course lead to a recovery in economic growth . . . but the timing and strength of recovery is highly uncertain”.
Fears for City’s position as world leader
Britain may lose out to Asia and the Middle East in its share of international finance unless it embraces reform, Sir Win Bischoff, the former chairman of Citigroup, said in a report commissioned last July by Alistair Darling.
The report, published yesterday, proposed a light- touch regime and benign, stable tax environment. It broadly hinted that regulators must not rush to over-regulate the City but conceded that new financial products should be more carefully assessed in terms of their impact on investors. The comment is a clear reference to criticisms that banks created complex financial instruments that traders did not understand.
The report also reiterated proposals to ban executive incentive schemes that encourage excessive risk-taking.
From The Times
