Bank of England backs another stimulus

[July 05, 2012]  LONDON (AP) -- The Bank of England on Thursday backed another 50 billion pounds ($78 billion) injection into the ailing British economy as it kept its main interest rate at the record low 0.5 percent.

The move by the Bank's rate-setting Monetary Policy Committee was widely anticipated and raises the amount it is pumping into the British economy since March 2009 to 375 billion pounds. It is the first stimulus since February.

Under the so-called quantitative easing program, the Bank purchases British government bonds, known as gilts, from banks, in the hope that they will use the money to lend to businesses and consumers.

The new purchases are expected to take 4 months to complete.

Britain is officially in recession, defined as two consecutive quarters of negative growth. Many analysts expect the recession to extend into a third quarter as Britain continues to be buffeted by the debt crisis afflicting the 17-country eurozone. Though Britain is not part of Europe's single currency, the eurozone is the country's main trading partner.

"The eurozone crisis acts as a great drag on the UK's ambition to export its way out of the long slump," said Charles Davis, head of macroeconomics at the Centre for Economic and Business Research.

Worries over growth are dominating over concerns that the bank's monetary largesse will stoke inflation. Price pressures have eased recently as oil and commodity prices have fallen, with consumer price inflation falling to 2.8 percent last month. As recently as last September, inflation was as high as 5.2 percent, more than double the Bank's official 2 percent target.

In a statement, the Bank said that without more stimulus it was increasingly likely that inflation would fall below the official 2 percent target in the medium term because of tight credit conditions, the government's deficit-reduction program as well as the eurozone's debt crisis.

As well as boosting the money supply, the Bank will soon launch its Funding for Lending program in an effort get more credit flowing. In its statement, the Bank noted other initiatives to free up money within the banking system.

"Taken together with reduced pressure on household real incomes, on the back of lower commodity prices, and the continued stimulus from past monetary policy actions, that should sustain a gradual strengthening of output growth," the Bank said.

Not everyone is so hopeful, and many analysts think the Bank may end up having to do more, such as buying corporate bonds from the banks, instead of just gilts.

"If the global economic background continues to deteriorate the Bank may consider not just more QE but widening the scope of its asset purchases or even adding new weapons to its monetary policy arsenal," said the Centre for Economic and Business Research's Davis.

[Associated Press]

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