Page last updated at 21:02 GMT, Thursday, 6 August 2009 22:02 UK

Extra 50bn pumped into economy

Bank of England
The Bank of England is extending its stimulus programme to 175bn

The Bank of England's rate-setters have decided to pump another £50bn of new money into the economy in their programme of quantitative easing.

It will take their total spending to £175bn, unexpectedly going over the £150bn set aside by the chancellor.

In a statement, they said that the UK recession "appears to have been deeper than previously thought".

The rate-setters also decided to keep interest rates unchanged at their historic low of 0.5% for a fifth month.

Fragile economy

BBC economics editor Stephanie Flanders said that the Monetary Policy Committee's (MPC) £50bn expansion of the programme had surprised many in the markets.

Stephanie Flanders
The Bank's policy makers probably believe there is still greater risk in doing too little than in doing too much
Stephanie Flanders, BBC economics editor

"Most expected the MPC to either put the quantitative easing policy on hold or simply spend the remaining £25bn authorised by the chancellor in March," she said.

"It's possible that the Bank of England has already done enough to support the recovery into next year, but no-one knows for sure."

"I think they believe that the fragility of the economy right now is such that there's more risk in doing too little than in doing too much," she added.

Following the announcement, the pound gave up much of its recent gains against the US dollar, falling more than 2 cents to $1.6776.

WHAT IS QUANTITATIVE EASING?
The Bank of England is trying to stimulate the economy.
It would normally do this by cutting interest rates, but with rates at 0.5% it has to create new money instead.
It gets the new money into the banking system by buying assets from banks.
The idea is the banks then lend the money to companies and individuals.
Businesses and consumers then spend it - buying goods, paying wages - which helps the economy recover.

Stephen Timms, financial secretary to the Treasury, said he thought the Bank had made the right judgment.

"I think it's a key element alongside all the other things we've done - the VAT cut; the decision to let companies under pressure put off taxes they owe through the Time to Pay arrangement; bringing forward, as we have done, investment planned for future years into the current year," he said.

"I think what we're seeing is all those measures in combination having the effect that we'd hoped they would have and a growing sense of optimism now that, as we said at the time of the Budget, the economy is likely to return to growth by the end of this year."

Slower rate

There will now be increased focus on the Bank's latest economic projections, which will be published in the quarterly Inflation Report on Wednesday, 12 August.

The extra £50bn will be spent over the next three months, which is a slower rate of spending than when the programme began in March.

Graph showing UK interest rates

The Bank has said it will have to expand the range of government debt it is prepared to buy.

In its statement, it also noted that "though there are signs that credit conditions may have started to ease, lending to business has fallen".

The British Chambers of Commerce picked up the theme, saying that "many viable small firms are finding it difficult to access credit".

It urged the MPC to buy more debt from companies instead of government debt, adding that "the risks of not persevering with an aggressive policy stimulus are much bigger than the risks of extending the QE programme".

'What has changed?'

There was some criticism from economists of the MPC's statement.

"I'm just struck by how backward looking a lot of it is, focusing on the economy in recession and that there is a large output gap," said Ross Walker, an economist at RBS Financial Markets.

"We knew all that, what has changed? They seem to be giving much more weight to the backward-looking data rather than believing the better surveys."

Many of the recent forward-looking surveys have suggested that parts of the economy have been improving.

Wednesday's survey from the Chartered Institute for Purchasing and Supply, for example, showed the service sector growing at its fastest for 18 months.

At the same time, house prices are now rising, according to the latest survey from the Halifax, while recent surveys by Nationwide and the Land Registry also suggested prices were increasing slightly.

The MPC's statement recognised that the surveys have suggested the bottom of the recession may be near.

"The pace of contraction has moderated and business surveys suggest that the trough in output is close at hand," it said.

Also on Thursday, the European Central Bank decided to keep its interest rates unchanged at 1%.



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FROM OTHER NEWS SITES
Times Online The Chancellors SOS: stimulate or squeeze? - 15 hrs ago
New Zealand Herald UK pumps $125b more into economy - 16 hrs ago
Financial TimesBank boosts quantitative easing programme - 19 hrs ago
Finance 24 Bank of England shocks market - 26 hrs ago
Telegraph Bank of England delivers 50bn surprise to the market - 28 hrs ago
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