BoE Launches QE2 by inventing 75 billion

The Bank of England voted on Thursday to buy 75 billion pounds more in assets to shield Britain's economy from the euro zone debt crisis and keep the faltering recovery going.

Sharon Lorimer

Thursday's decision to expand its asset purchase program to a total of 275 billion pounds highlights the precarious state of Britain's economy as global growth slows, government spending cuts and tax hikes bite and consumers face high inflation and slow wage rises.

The bank kept interest rates on hold at a record-low 0.5 percent.

Analysts in a Reuters poll had reckoned there was a 40 percent chance the central bank would restart its asset purchase programme, or quantitative easing, this month.

Meanwhile finance minister George Osborne said Britain will explore other policy options to get credit flowing to small businesses and complement the Bank of England's expanded quantitative easing program.

In a letter to BoE Governor Mervyn King, Osborne gave the go-ahead to the central bank to inject a further 75 billion pounds into the economy via the purchase of UK government bonds and other private sector assets.

"Given evidence of continued impairment in the flow of credit to some parts of the real economy, notably small and medium-sized businesses, the Treasury is exploring further policy options. Such interventions should complement the MPC's asset purchases," Osborne said.

King wrote to Osborne requesting permission to undertake the extra purchases, saying the global economy had slowed and that the euro zone debt crisis had created severe strains on financial markets. "In order to keep inflation on track to meet the target over the medium term, the committee judged that it was necessary to inject further monetary stimulus into the economy."

The asset purchases will be conducted over the next four months by the Asset Purchase Facility — a separate vehicle controlled by the BoE which holds the securities, and which is indemnified by the government.

A number of policymakers had flagged their readiness to join arch-dove Adam Posen and vote for more quantitative easing after many had already seen the case for more easing strengthening at the September meeting.

Britain's economy has basically flatlined over the past 12 months.

With the government's hands tied by its pledge to erase a budget deficit of some 10 percent, pressure has been mounting on the bank over the last couple of months to do more to support the economy.

All eyes will now be on the European Central Bank later this session to see if it primes markets for pre-Christmas interest rate cuts.

The BoE has kept interest rates at 0.5 percent for more than 2-1/2 years — already its longest period of inaction since World War Two.

The BoE had kept its stock of asset purchases at 200 billion pounds since February 2010, when the economy was picking up after a deep recession.

But the momentum shifted over the summer from a bias to hike rates to more easing, even though inflation is set to hit 5 percent soon, as equity markets slumped and the euro crisis triggered fears of bank collapses and a renewed recession.

 taken from http://www.cnbc.com/id/44797109