The
Bank of England’s Monetary Policy Committee voted to keep interest
rates at their current record lows on Thursday and authorised further
gilts purchases totalling £50bn, in line with economists’ expectations.
The move brings the size of the total gilts purchasing programme,
known as Quantitative Easing, to £325bn and suggests that, despite
recent signs that the UK economy is picking up after a trough in the
middle of last autumn, the Bank’s policymakers do not feel confident
there is enough momentum for demand to build on its own.
The
Bank said although there have been recent signs of improvement in
nation’s economy, “tight credit conditions and the fiscal consolidation
together present a headwind” that it is trying to counteract.
The pace of expansion in the UK’s main export markets has slowed “and
concerns remain about the indebtedness and competitiveness of some
euro-area countries,” it said.
The Bank also noted that inflation is on a downward path from its
September peak and that the effects of rising joblessness and falling
prices for energy imports are likely to pull the pace of price rises to
an even slower level.
Because of those concerns, the Bank felt that further purchases of
gilts would be necessary to keep inflation from falling below its 2.0
per cent medium term target.
“In the light of its most recent economic projections, the Committee
judged that the weak near-term growth outlook and associated downward
pressure from economic slack meant that, without further monetary
stimulus, it was more likely than not that inflation would undershoot
the 2 per cent target in the medium term.”
The pound was 0.3 per cent higher against the euro at €1.1961.
Analysts said that markets had already priced in a fresh £50bn of
liquidity, with the rise in sterling suggesting fears that the BoE would
announce a higher level than had been expected.
Yields rose to a high of 2.25 per cent from 2.15 per cent, a 10 basis
point jump, as some market participants sold gilts as they had hoped
for a bigger stimulus. Some in the market had forecast the Bank would
increase QE by £75bn.
Earlier on Thursday, the Office for National Statistics published two
sets of data that underscored the message from recent manufacturing
sector surveys that have raised hopes that Britain may not be heading
for two consecutive quarters of economic contraction.
Although GDP fell by 0.2 per cent in the three months to December,
there are signs it may be heading back into positive territory in the
first quarter of 2012.
However, economists have noted that strong headwinds remain. Four
years after the UK’s deepest recession since the second world war,
output remains some 4 per cent below its pre-recession level, the
slowest recovery since the mid-19th century.
Moreover, lenders have not been providing credit to households and
businesses at anything near pre-recession levels and unemployment is
rising.
The strongly improved official trade data released on Thursday reveal
that much of the better tone reflects a drop in domestic consumption of
imports – a sign of a weak economy – rather than a surge of exports.
A recent survey from the retailers’ trade body showed that the strong
surge in Christmas shopping was a temporary phenomenon and that
consumers have reverted to hoarding their cash once the holiday sales
period ended.
In addition, there are signs that the surging inflation rate is
heading back towards target. After peaking at 5.2 per cent in October,
its last reading was 4.2 per cent and the MPC’s last quarterly Inflation
Report in November suggested that it could fall below the 2.0 per cent
medium term target by mid- or late-2012.
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