Economy to receive £50 billion cash injection

The Bank of England Monetary Policy Committee yesterday voted to keep the base rate of interest at 0.5%, pleasing tracker mortgage holders but disappointing many savers. With little room for further cuts, the MPC announced that a further £50 billion will be used to stimulate the British Economy, on top of the £75 billion already earmarked.

In a statement, the MPC said:

“The world economy remains in deep recession. Output has continued to contract and international trade has fallen precipitously. The global banking and financial system remains fragile despite further significant intervention by the authorities. In the United Kingdom, GDP fell sharply in the first quarter of 2009. But surveys at home and abroad show promising signs that the pace of decline has begun to moderate.”

The measure, known as quantitative easing, involves creating extra money in the economy with which to buy government and corporate bonds. Such a move is intended to stimulate economic growth, which would ultimately improve the finances of British corporations and consumers, but there is not enough evidence at this stage to say whether it is working.

Explaining the decision, the MPC stated:

“That stimulus should in due course lead to a recovery in economic growth, bringing inflation back towards the 2% target. But the timing and strength of that recovery is highly uncertain.”

But some critics were doubtful as to whether the cash injection was necessary and indeed if it would be effective. Speaking to Reuters, Philip Shaw, economist at Investec said:

“We are a little taken aback by the decision to increase the quantitative easing target by 50 billion pounds. We had thought it more likely the Monetary Policy Committee would sit and wait to assess the impact of the existing programme rather than expand it right away.”

“Clearly, committee members have been spooked by some poor backward-looking domestic and international economic data. But the statement also points out that forward looking numbers are showing promising signs.”