Bank's £50bn QE boost fails to ease recession jitters

The Bank of England has decided to expand its asset purchase programme by a further £50 billion.

Although some members of the Bank's Monetary Policy Committee (MPC) were expected to press for a larger round of easing, today's broadening of the Bank's quantitative easing scheme fits with wider expectations.

The MPC's Adam Posen recently urged that a further £75 billion was needed to shore up the UK's financial system, however the minutes of the committee's meeting in January hinted that the rest of the Bank's rate setters were likely to resist Posen's calls.

Ahead of today's announcement, analysts at Barclays Capital said that the gulf between Britain's rate of inflation and central banker's target warranted a fresh liquidity injection.

'Given the size of the undershoot of the inflation target the MPC was projecting in November, we would expect further loosening and believe a £50 billion rise is the most likely outcome of this month's deliberations. We expect the Bank again to indicate that purchases will be exclusively of conventional gilts,' Barclays' Simon Hayes said.

What next?

Stocks' reaction to the Bank of England decision was fairly muted, with the UK's index of blue chip compaies up just 8 points at 5,883 at 12.08pm.  This signals that despite signs that activity picked up during January after GDP contracted by 0.2% in 2011's fourth quarter, today's boost to QE was largely priced in to equities.

Newton's Peter Hensman said that the next question on investors' lips will be what can the Bank do if the latest increase to QE - which takes the size of the overall programme to £325 billion - does not work.

He said: 'The indication toward the end of 2011 that the Bank wouldn't increase the scale of its intervention due to the difficulties in executing its already announced program meant that an extension of QE was likely once the £75 billion of purchases set out in October were completed.

'With continuing worries about the downside risks to the UK economy caused by the travails of the eurozone and the sluggish growth generated domestically, together with the expected moderation in CPI pressures evident in recent figures, the justification for action remained.  With this vast pool of gilts already owned by the Bank, arguably the greater question is what the MPC can do next if they believe further stimulus is required.'

Rates stay on hold

The  Bank of England, governed by Mervyn King, announced its interest rates decision at the same time as its verdict on an expanded programme of QE.  It chose to keep rates on hold at 0.5%.