BoE expands asset purchase plan
6th August 2009
The Bank of England left the UK Base Rate steady at 0.50% today, but surprised financial markets by increasing its quantitative easing programme by a larger-than-expected £50bln to £175bln.
In March, the Base Rate reached a record low of 0.50% and with the MPC judging that further monetary easing actions were required, the Central Bank launched an initial £75 billion asset purchasing programme. The aim of the programme was to boost “the supply of money and credit and thus raise the rate of growth of nominal spending to a level consistent with meeting the inflation target in the medium term”. Policymakers later decided to extend the programme by an additional £50bln in May, but evidence of how well this process is working is limited.
The BoE’s preferred measure of money supply grew only slightly faster in the second quarter of 2009 than the first and its policymakers have warned that it could take another six months before the picture gets much clearer. However, Britain’s economy moved a step closer to recovery this week, after data showing the service sector grew at its fastest pace in 17 months in July and a jump in factory output ignited hopes for a return to growth.
The success of the quantitative easing policy will ultimately be judged against the BoE’s objective of lowering the yields on gilts and corporate bonds, boosting corporate lending and ultimately helping to create conditions for a sustained recovery in confidence and economic activity.