Bank of England to inject £50 billlion into British economy

The Bank of England's Monetary Policy Committee (MPC) yesterday announced plans for infusion of a further £50 billlion into the ailing British economy over the next three months. Explaining the decision to increase the size of the asset purchase programme from £275 billion to £325 billion, the MPC conceded that business surveys taken since the turn of the year had shown a rather healthy economic picture, however it warned "weak outlook for near-term growth means that a significant margin of economic slack is likely to persist".

According to the bank, the tight credit conditions, coupled with the government's spending cuts and tax rises, would continue to act as a "headwind" for the UK economy.

The economy underwent a 0.2 per cent contraction in the final quarter of 2011 and there was also a warning of the risk from Europe, with the MPC cautioning that concerns over the economic health of some of Britain's continental trading partners remained.

According to the bank, without monetary stimulus, inflation would likely undershoot its 2 per cent target in the medium term. The consumer price index was down to 4.2 per cent in December with most analysts expecting it to continue to drop throughout 2012. The bank yesterday also kept its main interest rate at a record low level of 0.5 per cent, a level it had been at, for just short of three years.

An analysis by RBC Capital Markets said, the Bank of England would purchase around £16.7 billion of gilts, of varying maturities, each month, between now and March, which meant that the Bank of England would continue to buy up more gilts each month than would be issued to the market by the Debt Management Office, even as the pace of the net reduction of the size of the gilt market slowed.

Financial markets had initially forecast the MPC would increase its gilt purchases by £75 billion this month, these expectations were however cut in the wake of a succession of CIPS / Markit surveys signalling a return to growth across the services, manufacturing and construction sectors.