LONDON (Reuters) - The Bank of England will spend 75 billion pounds more of newly-created money to shield Britain’s economy from the euro zone debt crisis and keep a faltering recovery going, opting for an early, dramatic move to maximize the impact.
Following are comments on the BoE’s decision:
IAN MCCAFFERTY, CHIEF ECONOMIC ADVISER, CONFEDERATION OF BRITISH INDUSTRY
“With the risks to the economic outlook increasing, the MPC has acted promptly by extending quantitative easing this month.
“This measure will help support confidence, but we need to recognize that its impact on near term growth prospects is likely to be relatively modest.
“Only once the turmoil in the euro zone is resolved will confidence be fully restored.”
“The Committee finally recognizes that the major threat to the UK is renewed recession, not inflation. But previous experience suggests that the positive impact on the economy is likely to be modest.
“The accompanying statement put emphasis on the implication that there is more slack in the economy than previously thought. Unless the news on the economy improves markedly very soon, it seems unlikely that the MPC will conclude in four months that it has done enough.
“It would be optimistic to hope that the launch of QE2 will significantly brighten the outlook for the economy. The risks of recession remain alarmingly high.”
“By making purchases over four months, (the BoE) has afforded itself the forecast round for the February Inflation Report to calibrate and communicate its next response.
“Meanwhile by ramping it up to 75 billion pounds, the MPC has delivered ‘shock and awe’ and given itself enough ammunition to maintain a high run rate of gilt purchases.
“Purchases should be aimed at conventional gilts further out the curve than last time, owing to pre-existing ownership stakes and the MPC’s perception of where it has the greatest potential to reduce yields.
“We still expect the MPC to follow through with a further £25bn of asset purchases when it reassesses its forecasts in February. We also think the impact of these purchases will disappoint relative to the Bank’s estimates of QE1’s impact. Our working assumption is that the price level will be raised by about 0.5 percent but the impact on real activity is only about half that.”
“What did we want? More QE. When did we want it? Now.
“Near zero GDP and money supply growth made a compelling case, and the Bank of England was right to launch QE2.
“It could be argued that the Bank of England was slow to introduce QE the first time, but thankfully it hasn’t made the same mistake twice.”
“This latest 75 billion pounds increment should be considered the next downpayment on stability, rather than the last word on QE.
“And we would not be surprised to see the total asset purchase spend rise to 500 billion pounds, with this round of QE starting with today’s 75 billion pounds eventually adding a further 300 billion pounds to the QE1 total.
“The fact that the MPC chose to act now on QE and to go for 75 billion pounds rather than 50 billion pounds reflects the fact that they believe an already difficult outlook for the economy has deteriorated amid mounting domestic and global headwinds.
“The MPC expects the new program of QE to take four months to complete. We suspect that further QE will then be extended further in the first quarter of 2012.
“However, it seems unlikely that the Bank of England will take interest rates any lower than 0.50 percent, although the minutes of the September MPC meeting indicated that they reviewed this option.
“It is apparent though that any interest rate hike has disappeared into the horizon. Indeed, we do not expect any increase in interest rates before 2013.”
JOHN WALKER, NATIONAL CHAIRMAN, FEDERATION OF SMALL BUSINESSES
“With growth revised downwards yesterday, pumping more money into the economy through quantitative easing is welcomed.
“However, it is important that in an attempt to boost short-term demand that small businesses can directly benefit from this cash injection and that the banks use it to decrease the cost of credit and to increase the availability of lending.
“While the introduction of credit easing aims to give small businesses access to credit, we also need to see a commitment to keep interest rates low until the economy has seen a prolonged period of growth.”
“They’ve taken a fairly aggressive step. That they’ve moved with 75 billion (pounds) is indicative of the scale of the uncertainty and the strains they are feeling in the global markets ... This shows the BoE will be aggressive from this point forward.
“Clearly it’s a net negative for sterling.”
“It’s a good injection of capital. We now just need to see a coordinated effort from the rest of Europe to sort out the recapitalization of European banks and it should form a decent base to move forward.
“It takes away quite lot of risk. This is positive for the market.”
“The MPC has chosen to waste no further time in injecting additional stimulus into the flagging recovery in the face of a rapidly deteriorating economic environment.”
“With business and consumer confidence hit by austerity measures at home and the financial crisis in the euro zone, which is in turn subduing the global economy, prospects for the UK economy have worsened considerably in recent weeks.”
“Policymakers are concerned that it is becoming increasingly evident that we are not just seeing a soft-patch in the recovery. Instead, the risks of slipping back into recession have become sufficiently high to warrant immediate action, rather than waiting until their new growth and inflation projections are available at the November meeting.”
“The strategy is of course not without risk. Not only are there question marks over the effectiveness of quantitative easing in its current form, but printing more money is inflationary, and high prices are already one of the factors hurting households and subduing economic growth.”
“However, it is perhaps at least a worthy sticking plaster, which should bolster the domestic economy and play an important role in the global response to the slowdown, until European policymakers can find a resolution to the region’s sovereign debt crisis and the UK government outlines a coherent strategy for growth, both of which are required to lift confidence among business and households for any recovery to be robust and sustainable.”
“We (and market consensus) expected stable policy today. We anticipated a bold move in November, with the update projections of the Inflation Report.
“The decision was mainly based on two factors: expectations of lower growth that could be also weaker with the negative effects of the current market volatility (via less funding to businesses and consumers), expectations of inflation undershooting the target in the medium term.
“MPC now clearly looks through the upcoming spike in headline inflation and sees downside risks for inflation in the medium term to prevail. As we highlighted in our preview, we expected the MPC to act in November with a somehow bold increase in QE (additional 100 billion pounds).
“In our view, such a ‘delay’ would have been easier to communicate.”
“The only surprise was the timing, if anything. We expected them to move in November, but obviously the move to additional QE had been well-flagged. The only other surprise was the size, 75 billion, which is obviously what they started with back in March of 2009, they started with 75 billion, which equates to around five percentage points of GDP so it is fairly sizeable.”
Reporting by London bureau