BOE backs new stimulus as ECB holds rates steady

The new stimulus, approved by the nine-member Monetary Policy Committee on Thursday and which echoes moves by the U.S. Federal Reserve, had been widely expected in the markets following figures a couple of weeks back showing the British economy contracted by 0.2 percent in the fourth quarter of 2011. The accompanying decision to keep the main interest rate unchanged at the record low of 0.5 percent was expected too.

The hope is that by increasing the amount of money in the financial system, the purchases, known as quantitative easing or QE, will loosen credit for businesses and raise asset prices. Quantitative easing can be inflationary, but analysts say the bank has room to act especially as interest rates are set to fall sharply this year.

The fresh injection raises the total the Bank has ploughed into the program to 325 billion pounds (US$515 billion). The program started in March 2009 after rates had been slashed to below 1 percent in the wake of the collapse of U.S. investment bank Lehman Brothers and the ensuing deep recession. It was paused in December before restarting again in October last year with a 75 billion pounds (US$116 billion) injection.

“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 percent target in the medium term,” the bank said in a statement.

Though inflation is running at 4.2 percent, and more than double the Bank's 2 percent target, it is expected to fall back sharply this year as last year's sales tax increase and energy price spike drop out of the annual comparison.

The European Central Bank held its key interest rates steady, as expected on Thursday, leaving eurozone borrowing costs at historic low levels after cutting rates twice in recent months.

The ECB's policy-setting governing council voted to leave the rate for its main refinancing operations unchanged at 1 percent at its regular monthly meeting here.

Earlier in London, the Bank of England also held its rates steady at a record low of 0.5 percent and said it would inject another 50 billion pounds (60 billion euros, US$80 billion) into Britain's weak economy.

No changes in ECB rates had been expected this week following the recent rate cuts and the unprecedented amounts of liquidity pumped into the banking system to avert a possible credit crunch in the eurozone economy.

Subscribe to The China Post and save 25%. Click here

PrintEmail

Write a Comment

Terms

Enter your comments - 3000 characters max

Type in image code

Submit

 Receive China Post promos
 Respond to this email