- The Bank of England responded quickly to inject a further round of stimulus into the economy
- Governor warned that the nation may be facing its "most serious financial crisis ever"
- Official data released shows that the UK recession of 2008-09 was even deeper than previously believed
The Bank of England acted more swiftly and more decisively on Thursday than most economists had expected to inject a further round of stimulus into the economy, as its governor warned that the nation may be facing its "most serious financial crisis ever."
The Bank's Monetary Policy Committee voted for the first time since November 2009 to increase its purchases of gilts, this time by a further £75bn to £275bn. Many economists had expected the move, known as quantitative easing, to come in November after the MPC reviews its forecasts for growth and inflation and that it would opt for a more limited £50bn move.
The European Central Bank, feeling the heat of the eurozone's sovereign debt crisis, also escalated its use of unconventional policy weapons. It will extend its policy of providing unlimited liquidity to eurozone banks and plans to include 12-month loans this month and 13-month loans from December that will bridge two crucial year-end periods when banks are keen to show strong financial figures. It also unveiled a €40bn ($54bn) programme to buy so-called covered bonds -- ultra-safe investments issued by banks.
Explaining its decision, the Bank of England made clear that its concerns were twofold. "Vulnerabilities associated with the indebtedness of some euro-area sovereigns and banks," threatened to spill over into the UK, it said. But homegrown woes were also mounting.
"The Bank of England has arguably been bolder and taken a greater risk. The ECB did more what was expected -- and may have to do more," said Erik Nielsen, chief economist at UniCredit.
Official data released this week shows that the UK recession of 2008-09 was even deeper than previously believed and that the recovery this year has been more anaemic.
Sir Mervyn King, the Bank's governor, said "this is the most serious financial crisis at least since the 1930s, if not ever". He later told Sky News that global economic prospects had deteriorated over the previous three months. He declined to rule out even more gilts purchases in the months ahead. Economists predict that the latest round will be only one of several.
Both the Bank of England and the ECB left interest rates unchanged, at 0.5 and 1.5 per cent, respectively. The FTSE100 share index ended the day nearly 4 per cent higher while gilt yields and sterling fell.
Britain remains committed to the plan of strict fiscal retrenchment set out by Chancellor George Osborne, which rules out more government spending to offset the flagging demand of households and businesses. Economists said that leaves only monetary policy as a tool to ward off another recession.
Jens Larsen, chief European economist at RBC Capital Markets, said: "It underlines that we have a macroeconomic strategy here: tight fiscal, loose money, if you had any doubts that this was how UK macro policy was being conducted, then this is confirmed."
In a letter to Mr Osborne, Sir Mervyn made clear that monetary policy is to be clearly separated from fiscal policy. Planned efforts at "credit easing" intended to help unblock lending channels for smaller businesses were a "complement" to Bank asset purchases, not a substitute for it.
The move comes amid rising fears that European politicians are unable to find a satisfactory solution to the region's crisis in which the debts of sovereign governments and their banks threaten to reinforce the weakness of both.
Michael Saunders, economist at Citi, said the move amounts to a vote of no-confidence in G-20 leaders who are to meet in November to patch up an agreement on the Eurozone's woes. "The likelihood that the G-20 will get the world economy back to its previous growth path is nil," Mr Saunders said.