BoE boosts quantitative easing by £25bn

The Bank of England today pumped another £25 billion into its radical quantitative easing programme in a bid to support the fledgling economic recovery.

The latest move takes the total amount of new money created so far to £200 billion.

Economists had been widely anticipating a further injection after the latest GDP figures revealed that the UK remained mired in recession in the third quarter when most other industrialised countries, including the US, have now returned to growth.   

The 0.4% fall marked the sixth consecutive quarter of contraction.

However, opinion was sharply divided as to how far the bank should go in topping up its asset purchase programme. 

Azad Zangana, European economist at Schroders says: "The UK's failure to exit recession in the third quarter will have swayed the monetary policy committee's decision to extend QE, despite recent strong signs of activity from private business surveys and pick up in house prices.

"Nevertheless, we see this as a step too far and barring any major negative shocks in economic data, the Bank of England will enter a 'wait and see' period for the next few months before considering raising interest rates from the current emergency low levels."

Howard Archer of IHS Global Insight believes there could have been significant divisions within the MPC over whether or not to extend QE, and by how much, "given the current uncertainty as to the true state of the economy resulting from conflicting data and survey evidence."

"We suspect that this will be the final extension to the Quantitative Easing programme unless the economy suffers a major relapse in 2010. The Bank of England may well be reluctant to further extend Quantitative Easing given recent stickier than anticipated inflation and sterling's weakness," he adds. 

However, Erik Britton, Director at Fathom Financial Consulting warns: "Simply buying gilts will continue to have little impact on the real economy , for cash-strapped businesses and households alike. Instead, we favour the redirection of Quantitative Easing (QE) towards real assets, in particular housing, and even equity in banks and other recovery-critical institutions.

"The economy needs further support, and QE is the only lever that is still available to policy makers.  Ideally it would not just be more QE, but also better QE.'

Promising data

Recent data has pointed to a further pick-up with manufacturing output rising by a more-than-expected 1.7% in September - its fastest pace since July 2002 and a sharp rebound from August's drop.

New car registrations also climbed for a fourth consecutive month in October at a sharply increased rate of 32% to 168,942, the Society of Motor Manufacturers said today.

Earlier this week, Halifax reported that house prices rose for the fourth consecutive month in October, up 1.2% to £165,528 amid stronger demand, a low level of homes on the market and a pick-up in consumer confidence on the back of better economic news.

However, interest rates remained frozen at 0.5% with little expectation they will rise until the middle of next year.

The official base rate has remained at an all-time low of 0.5% since March, having been cut from 5% in October last year.

The pound jumped up to $1.6636 following the Bank's announcement and is holding steady against the euro, currently trading around 1.1150.

Duncan Higgins, senior analyst at Caxton FX said, 'We are not expecting today's news to weigh too heavily on the pound in the short term, as this extension had already been priced into the market.

'Indeed, in not extending QE as far as some had anticipated the pound should find slight relief, with the BoE showing more confidence in the economy than the more bearish market participants.'