Bank of England Opts Against Another Stimulus

Thursday, 07 Mar 2013 09:49 AM

 

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The Bank of England has opted against injecting more money into the ailing British economy, which has one foot in recession but stubbornly-high inflation.

The central bank said Thursday its main policymaking body, the Monetary Policy Committee, decided to maintain its asset purchase program at 375 billion pounds ($563 billion).

A number of economists thought another 25 billion pounds infusion was possible. Last month, Governor Mervyn King and two others of the 9-member panel had pushed for such an increase.

Minutes of the two-day meeting will be published on March 20 and investors will be interested to see the details of the debate.

No explanation behind the decision was provided but one of the reasons the majority may have opted against a further stimulus is likely to have been that inflation in the U.K. is running at an annual rate of 2.7 percent, above the Bank's official 2 percent target. And inflation is expected to go higher in the coming months and could end up rising even more if the money supply is swelled further.

"Signs of better growth in the service sector, alongside above-target inflation, are likely to have convinced some members that further stimulus was not appropriate at the moment," said Chris Williamson, chief economist at Markit.

Under the program, which started in March 2009, the Bank has bought government bonds from financial institutions with newly created money. The hope is the banks use the cash to lend more, lowering credit rates and encouraging economic growth.

Policymakers resorted to such stimulus having already reduced the Bank's main interest rate to the lowest level since it was founded in 1694. Other major central banks — notably in the U.S., eurozone and Japan — have also cut their rates to record lows and, in some cases, also pumped new money into their economies.

Critics say the Bank of England's program has done little to revive the British economy, which contracted by a quarterly rate of 0.3 percent in the last three months of 2012. Another fall in the first quarter will mean the British economy, the third-largest in Europe, will be in recession for the third time in a little over four years.

Even though the British economy has made little headway since the financial crisis, proponents of the stimulus program say it has prevented an even worse performance.

Many in the markets think that Mark Carney, the Bank of Canada governor who is due to replace King at the helm in the summer, will back novel new approaches to get the economy going again. Whether that means more stimulus remains an open question.

The Bank of England on Thursday also kept its main interest rate at 0.5 percent.

The news that the stimulus program would not be expanded helped shore up the pound which has been falling sharply over recent weeks amid expectations of a further monetary stimulus. Soon after the decision, it was trading 0.5 percent higher at $1.5064, having dropped below $1.50 before.

© Copyright 2014 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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