Page last updated at 14:29 GMT, Thursday, 7 May 2009 15:29 UK

Economy to get extra 50bn boost

Graph of UK interest rates

The Bank of England has kept interest rates on hold at 0.5% and announced that it will inject an extra £50bn into the UK economy.

With little room for rate cuts to stimulate the economy the Bank has been pumping money into the banking system through quantitative easing.

The process involves the Bank effectively printing money to buy government and corporate bonds.

It is on track to spend £75bn by June and will now extend this to £125bn.

After the announcement, the pound fell 0.37 cents against the US dollar to $1.51 and 0.67 cents against the euro to 1.13 euros.

According to the BBC's economics editor Stephanie Flanders, the Bank's decision indicated there is a lot more still to be done to stimulate bank lending and the economy.

But the evidence to date on whether the policy has been helping the financial system has been mixed, she said.

The Bank's own statements on the current state of the economy were equally so.

It acknowledged that "the world economy remains in deep recession", but added that, "surveys at home and abroad show promising signs that the pace of decline has begun to moderate".

The Bank of England's decision on interest rates came shortly before the European Central Bank decided to cut its own interest rate from 1.25% to 1%.

'Going to plan'

Stephanie Flanders
Stephanie Flanders, BBC economics editor

The evidence on quantitative easing (QE) to date has been mixed.

We won't get a clear steer on how the Bank itself thinks things are going until next week's Inflation Report.

But the message of today's decision is that the MPC thinks there's a lot more to do.

There is nothing especially surprising in the statement itself, though note that the MPC has now joined those who see "promising signs that the pace of decline (in the UK) has begun to moderate."

That said, "the timing and strength of... recovery is highly uncertain." No news there.

Some City economists said it may be a hopeful sign that the Bank's programme of quantitative easing has only been extended to £125bn, given that the Treasury has said the Bank can spend up to £150bn.

"It may suggest they're reassured that the recovery is going to plan," Alan Clarke, an economist at BNP Paribas told the BBC.

However others, including Commerzbank's Peter Dixon, said the expansion of quantitative easing could indicate that "the Bank is concerned about the weakness of the economy and the impact that's going to have on financial markets".

Market impact

The aim of quantitative easing is to boost bank lending by making more, cheaper funds available.

Yields on government bonds give one potential indication of the Bank of England's success in boosting lending.

"Yields on gilts and corporate bonds are still too high, and the growth of money held by industrial and commercial companies is too weak," said David Kern, economic advisor at the British Chambers of Commerce.

The yields may, however, be lower than they would otherwise have been without QE.

Signs of improvement?

Figures released last month showed that the UK economy shrank by 1.9% in the first three months of 2009, the biggest three-month decline in GDP since the third quarter of 1979.

And the latest unemployment figures showed the number of people out of work in the UK rose by another 177,000 to 2.1 million between December and February.

However, recent surveys appear to have indicated that the pace of the downturn is slowing.

Purchasing managers' indexes indicated that the pace of the downturn in the manufacturing sector had slowed by an unexpectedly large amount in April, while the service sector shrank at its slowest pace since last August.

In addition, the Nationwide Building Society said earlier this week that UK consumer confidence had seen its biggest rise in two years last month.

There are also signs that the mortgage market may be starting to revive, with figures indicating that the number of mortgage products on offer is rising, and that lenders are starting to accept smaller deposits from house buyers.

The official measure of inflation - the Consumer Prices Index (CPI) - fell to 2.9% in March, while the Retail Prices Index (RPI) measure dropped to -0.4%, the first time it has been negative since 1960.

While the CPI measure remains above the 2% target, the Bank said it was likely to drop below this level later this year, partly as a result of lower food and energy prices.

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