Page last updated at 12:58 GMT, Thursday, 5 November 2009

Extra 25bn to stimulate economy

Graph showing UK interest rates

The Bank of England's rate-setters have decided to pump an extra £25bn into the economy in their quantitative easing (QE) programme.

They also kept interest rates unchanged at 0.5% for an eighth month.

The Bank has already spent £175bn on QE, which involves printing money to buy assets from banks and other companies to stimulate the economy.

The extra £25bn will be spent over the next three months, which is a slower rate of spending than before.

In the previous three months the Bank had spent £50bn.

Stephanie Flanders
Stephanie Flanders, BBC economics editor

The MPC is not ready to take its foot off the accelerator, but it is easing it off the floor.

By voting to inject a further £25bn into the economy, the Bank's policy makers have signalled that they do not think the economy is out of the woods yet.

But they have halved the rate at which that money is being spent. In the first five months of QE, the bank was spending £25bn a month. Since August, the monthly purchases have fallen to about £17bn. Now the MPC plans to spend three months purchasing assets of £25bn - a monthly average of about £8bn.

If the economy behaves more or less as the MPC expects, you could say they have put themselves on a path to put an end to QE at their February meeting, or at least put the policy on hold.

"It would be interesting to learn why the committee has gone for a smaller expansion of asset purchases than previously," said Philip Shaw, economist at Investec.

"That might reflect some concerns over the medium-term inflation background or a big split on the committee."

Bank of England governor Mervyn King had to write to Chancellor Alistair Darling for permission to allocate the extra money.

"Households have reduced their spending substantially and business investment has fallen especially sharply," Mr King wrote to Mr Darling.

"A number of indicators of spending and confidence, however, suggest that a pickup in economic activity may soon be evident."

Economists have suggested that the slowing in QE spending could mean the programme will end when this latest £25bn has been spent.

"We suspect this will mark the last stimulus effort from the Bank of England, with the next move being to rate hikes, possibly starting in August after the Bank has assessed the impact from any potential fiscal policy changes in the wake of next year's election," said James Knightley, an economist at ING.

'Finely balanced'

Business groups welcomed the extension, saying that without it there would be a danger of the economy losing momentum.

The Bank of England creates new money
It uses it to buy bonds from banks and other companies
It hopes that the extra money will enter the economy, for instance as loans to consumers, and thus encourage spending

"Today's decision was always going to be finely balanced, but the MPC has clearly seen through the recent upbeat data and recognised the underlying fragility of the economy," said Steve Radley, chief economist at the manufacturers' organisation EEF.

Earlier on Thursday, data from the Office for National Statistics showed that manufacturing output in September had grown at its fastest rate since July 2002.

The bigger-than-expected 1.7% growth in the month followed August's hefty drop of 2%.

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