(FT) -- The Bank of England's monetary policy committee voted on Thursday to expand its vast program to pump cash into the UK economy by £25bn ($41bn), in a sign that it remains worried about the outlook in spite of incipient signs of recovery.
As expected, the Bank left interest rates unchanged at 0.5 per cent.
The move to increase "quantitative easing" -- creating money in order to boost spending -- from the existing £175bn used had been widely expected by economists after official figures suggested the UK remained mired in recession in the third quarter.
However, the addition of a further £25bn to the program, which is likely to be used mostly to buy government debt, signals a slowing down in the pace of the Bank's pace of monetary easing. In August the Bank had opted to expand the program by £50bn, which has been used up over the last three months.
The additional £25bn in quantitative easing will take the total program undertaken by the Bank to £200bn. The new money will be spent over the next three months.
The MPC said that the world economy had "shown signs of recovery" and that asset prices had risen internationally, "reflecting both the gradual improvement in the economic climate and accommodative monetary policies."
In the UK, it said that although the third quarter had registered a continued contraction in the economy "a number of indicators of spending and confidence, however, suggest that a pickup in economic activity may soon be evident."
It said that two sets of opposing forces were facing the economy. On the one hand, loose monetary and fiscal policy offered the prospect of a substantial stimulus to growth, and the weak pound should improve the competitiveness of UK producers.
But on the other hand, the committee said that "the need for banks to continue the process of balance sheet repair is likely to limit the availability of credit. And high levels of debt will weigh on spending."
As a result it expects "a slow recovery in the level of economic activity" so that spare capacity in the economy that is being underused as a result of the recession should bear down on inflation "for some time".
Ian McCafferty, chief economic adviser to the CBI welcomed the decision. "Extending quantitative easing ought to provide an extra degree of support for business and consumer confidence," he said.
"It will have been a finely-balanced decision for the Bank, as the impact of QE is difficult to quantify. We do not know what the economy would have looked like without a QE policy, and we do not know how long it takes for its various effects to have their full impact.
David Kern, chief economist at the British Chambers of Commerce, said that more needed to be done. "It is important for the MPC and the Government to act decisively in order to unblock obstacles to bank lending. One critical factor delaying Britain's exit from recession is the difficulty smaller firms face obtaining adequate finance."
The MPC will have made its decision with reference to the Bank's quarterly inflation forecasts, due to be published next week. The Bank has signaled that it is more likely to make significant departures in monetary policy only on a quarterly basis once it has seen the inflation forecasts -- probably because QE is a new policy and its effects are not clearly understood.
In fact, it remains hard to gauge the extent to which the scheme, which has already created new cash equivalent to about 12 per cent of nominal gross domestic product, has been effective.
Although the recession has eased sharply since the beginning of the year, it is not yet clear whether it is over. One key goal of the program -- to increase the money supply in order to boost spending -- shows little sign of hitting the levels that the Bank would like to see.
Moreover, bank lending has remained very weak, which at least in the early days of the program was seen as an important mechanism for its functioning by the Bank.
The program has probably been particularly important in supporting confidence -- the sense that even after interest rates have fallen nearly as far as they can go, the Bank still has more ammunition in its armory with with which to attack the recession.
One area in which it does appear to have helped is in supporting stock and bond market issuance by large companies - allowing larger credit worthy businesses to circumnavigate the troubled banking system in order to raise funds.
However, small and medium sized businesses, which cannot access the capital markets so easily, still say that they are strapped for cash.
The massive purchases of gilts that the program has involved -- £170bn out of the £175bn spent so far -- has also helped to push down yields on the mountain of government debt.
© The Financial Times Limited 2009
