Bank of England launches QE3 on to a still-stormy sea…(UK Death Spiral Continues!)
A new £50bn round of quantitative easing suggests the Bank remains concerned about the economic climate
by Larry Elliott
Thursday 9 February
Bad news for savers. Tough times ahead for pension funds. Precious little joy for everybody else. That was the subtext to the Bank of England’s announcement on Thursday that it needed to conjure up a bit more money creation to steer the economy away from the rocks of a double-dip recession.
Clearly, Threadneedle Street believes 2012 is going to be a rotten year. It has doubts about whether the rally in the eurozone is for real. It knows that tight credit conditions are throttling private-sector growth. It senses that it will take time for falling inflation to end the squeeze on real incomes. And it is aware that the big public spending cuts are still to come.
As a result, what the Bank announced on Thursday was a damage-limitation exercise. Faced with what it called “headwinds”, the Bank decided it had no alternative but to pump an additional £50bn into the economy over the next three months. That will take the total purchases of UK government bonds to £325bn, or about one third of the liquid gilts market.
This is the insurance policy against a messy Greek default that has knock-on effects across the rest of the single currency zone, depressed consumer spending, an investment strike by companies hoarding their cash, and the biggest programme of spending cuts in living memory. True, the recent surveys have painted a more positive picture but the Bank is worried it might be a suckers’ rally. Next week’s quarterly inflation report will flesh out the reasons for today’s move, but is likely to show the economy flatlining this year and inflation dropping like a stone.