The Bank of England has said it will inject a further £75bn into the economy through quantitative easing (QE).
The Bank has already pumped £200bn into the economy by buying
assets such as government bonds, in an attempt to boost lending by
commercial banks.
But this is the first time it has added to its QE programme
since 2009. There have been recent calls for it to step in again to aid
the fragile recovery.
The Bank also held interest rates at the record low of 0.5%.
On Wednesday, data showed the UK economy grew by 0.1% between April and June, which was less than previously thought.
"In the United Kingdom, the path of output has been affected
by a number of temporary factors, but the available indicators suggest
that the underlying rate of growth has also moderated," the Bank said in a statement.
"The deterioration in the outlook has made it more likely that inflation will undershoot the 2% target in the medium term.
"In the light of that shift in the balance of risks, and 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."
Sterling fell by almost two cents after the announcement to $1.5280, its lowest since late July 2010.
'Warranted'
The CBI and the British Chambers of Commerce
(BCC) business groups welcomed the Bank's move to expand the QE
programme to £275bn, but said that on its own, its impact would be
limited.
"This measure will help support confidence, but we need to
recognise that its impact on near term growth prospects is likely to be
relatively modest," said Ian McCafferty, the CBI's chief economic
adviser.
"Only once the turmoil in the eurozone is resolved will confidence be fully restored."
David Kern, chief economist at the BCC, said: "Higher QE on
its own is not enough and we urge the MPC [Monetary Policy Committee] to
look at other radical methods.
"There is a strong case for the MPC to help boost bank lending to businesses by immediately raising its purchases of private sector assets."
The manufacturers' organisation, the EEF, said that the
Bank's decision to act now, before the third-quarter estimates of GDP
and its latest inflation forecast were released, "would indicate that
members believed immediate action was warranted in order to head off a
deteriorating growth outlook".
However, the National Association of Pension Funds (NAPF) is
calling for an urgent meeting with the pensions regulator to discuss
ways of protecting UK pension funds from the negative effects of QE.
QE tends to push down long-term bond yields, therefore reducing the return on the investments made by pension schemes.
"Quantitative easing makes it more expensive for employers to
provide pensions and will weaken the funding of schemes as their
deficits increase," said Joanne Segars, chief executive of the NAPF.
"All this will put additional pressure on employers at a time when they are facing a bleak economic situation."
Complementary actions
The governor of the Bank of England, Mervyn
King, wrote to the chancellor earlier on Thursday, setting out the MPC's
case for expanding the asset purchasing programme.
In his letter of response, in which he authorised the move,
Chancellor George Osborne said: "I agree that an increase in the ceiling
would provide the MPC with scope to vary the stance of monetary policy
to meet the inflation target."
In his speech to the Conservative Party conference earlier in
the week, Mr Osborne said that the Treasury would look into "credit
easing" - a way to underwrite loans to small businesses who are
struggling to get credit now.
He confirmed this in his letter to Mr King: "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 actions. Such interventions should complement
the MPC's asset purchases."
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