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Bank of England halts quantitative easing

Guardian Economics 4th February 2010

UK's £200bn programme of asset purchases – known as quantitative easing – on hold, Bank of England announces

The Bank of England's monetary policy committee today said it was putting its £200bn quantitative easing programme on hold, but warned the economy remained sluggish and said it would start buying assets again if need be.

The move, widely expected in the City, came with the jury still out as to whether the British economy – which grew by a meagre 0.1% in the fourth quarter of 2009 – has entered a self-sustaining recovery or is still dependent on support.

The MPC also, as expected, left its key interest rate at a record low of 0.5%. Few analysts expect any change in rates until later this year at the earliest, with whoever wins the spring election likely to start tightening fiscal policy.

The MPC began its QE experiment in March last year, when the world economy was on the brink of collapse and after it had slashed interest rates to nearly zero. It only completed the purchases, which were mainly of government bonds, or gilts, last week. Many other central banks around the world adopted similar policies.

In a downbeat statement accompany­ing its announcement, the MPC said that while the economy was likely to continue its gradual recovery, the committee was concerned that credit conditions in the economy were likely to remain "restrictive".

And it stressed that it was pausing, not stopping, QE: "The committee will continue to monitor the appropriate scale of the asset purchase programme and further purchases would be made should the outlook warrant them."

Economists said it was notable that the committee was now talking about a gradual recovery, whereas previously it had been predicting a V-shaped one.

"Even if this really is the end of quantitative easing, any policy tightening still looks a long way off, given that the recovery is likely to remain fragile for some time to come," said Howard Archer, economist at IHS Global Insight.

Ian McCafferty, CBI chief economic adviser, said: "It is unsurprising that the Bank has kept interest rates and its quantitative easing policy at the same levels. The situation is finely balanced.

"The economy is stabilising but still faces some serious headwinds, and recovery remains shallow-rooted. However, near-zero interest rates, the existing £200bn QE package and the sharp fall in sterling are already extremely expansionary and inflation has exceeded expectations consistently in recent months."

Economists said the MPC's next quarterly inflation report, to be published next week, would probably be more downbeat than the November one, given that the UK seemed to be having a harder time than other big economies emerging from its deepest recession in decades.

George Buckley, UK economist at Deutsche Bank, said he thought the MPC was unlikely, although only just, to resume QE in the future. "While we think today's pause marks the end of the QE programme, the risk of a double-dip in economic activity – in the near-term due to higher VAT, the imminent end of the car scrappage scheme and inclement weather; in the longer term due to the need to reduce public and household sector debt – means that we can't fully write off the chance of further stimulus just yet."

Separate data from the Halifax showed another rise in house prices last month, while the Society of Motor Manufacturers and Traders reported a strong rise in car sales thanks to the scrappage scheme.

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