QE to increase by £50 billion to £375 billion
The Bank of England’s Monetary Policy Committee has voted to raise quantitative easing by £50 billion to a total of £375 billion.
It had been anticipated that the size of the asset purchase programme, financed by the issuance of central bank reserves, would be increased. And the decision to maintain the official Bank Rate at 0.5% was also expected
The Committee pointed to the stagnant UK economy and weak outlook for growth plus the indebtedness of several euro zone countries as reasons for the additional monetary stimulus.
Members of the Committee felt that without the extra money it was more likely than not that inflation would undershoot its 2% target in the medium term. CPI inflation fell to 2.8% in May and is likely to edge down further in the near term, said the Committee.
It also agreed that the Funding for Lending Scheme, which will be launched shortly, was a welcome initiative.
Andrew McPhillips, chief economist at Yorkshire Building Society, commented: “This programme of QE, alongside the recent announcement of a 'funding for lending' scheme, highlights the MPC's concern that the UK is being negatively impacted by developments in the euro zone and hopes to offset this to some extent by taking action now.
“However, the ability of Europe's political leaders to agree a practical solution, and more importantly to put it into practice, will be the greatest determinant of UK economic performance."
Brian Murphy, head of lending at Mortgage Advice Bureau, said: “Mortgage activity has slowed in the last month and how much this latest round of QE will encourage lenders to provide more mortgage finance is unclear.
“We are more interested in seeing details of the ‘funding for lending’ scheme announced by the Bank of England last month. We hope this will have a more direct impact on the amount of lending to individuals.”
Robin King, director at residential property specialist, Move with Us, said the decision to keep interest rates on hold brings little cheer to the property market and believes a cut in Base Rate, which the Committee has discussed, is needed.
He commented: “The property market desperately needs a major jolt and swift action from the government. The only way we will move out of the current impasse is for the government to be bold and make an intervention. Having the confidence to move in to negative territory by slashing rates is what is needed.
“Unless lending becomes more readily available, demand for properties will continue to remain subdued. With minimal movement in house prices and a low turnover of housing stock, people will just have to continue to sit tight and be ‘locked in’ to their current properties.”
However, McPhillips disagreed and said: “The decision to maintain the Base Rate is unsurprising as the MPC has considered and rejected a reduction on a number of occasions, including last month.”
Adrian Coles, director-general of the Building Societies Association, commented: "With the economy in a second period of recession, an expansion in the quantitative easing programme was a predictable response. The additional asset purchases of £50 billion should in theory help lower interest rates, support asset prices and encourage lending, but the extent to which it will help is unknown.
"The BSA welcomes an expansion of the Asset Purchase Programme as opposed to a cut in the Bank Rate which would directly hurt savers even more than they have already suffered."