Recession "deeper" than expected
The Bank of England has warned that the recession is likely to be deeper and longer than previously expected - and hinted that it may have to print more money in order to stimulate economic growth.
In its latest inflation report, the central bank warns that the prospects for inflation and economic growth remain “unusually uncertain” - presenting a significant risk that the recession could be “more pronounced” that originally forecast.
This means that the Bank of England’s Monetary Policy Committee (MPC) could cut the base rate again when it meets in March, despite the rate already sitting at an historical low of 1%. It may also have to take other monetary measures to inject more money into the economy.
“The Bank of England’s Inflation Report gives an extremely strong signal that it is intending to implement significant further policy easing, both in terms of further rate cuts and unconventional measures like quantitative easing,” says Jonathan Loynes, chief European economist at Capital Economics.
So, is the Bank of England about to start printing money? Richard Snook, senior economist at the Centre for Economic Business Research, believes so.
“The Inflation Report paints an unambiguously gloomy picture of the synchronous downturn in the global economy and supports this with recent economic and survey data,” he says.
The Bank of England does suggest that the recession could be short-lived with economic growth turning positive at the start of 2010. This optimistic forecast is based on the central bank printing more money, says Snook.
“This scenario, unimaginable two years ago, would be a stunning indictment of UK economic and monetary policy over the last 12 years,” he adds.
Lower interest rates encourage people to spend, not save. But when interest rates can go no lower and there is a sharp drop in consumer and business spending, a central bank’s only option to stimulate demand is to pump money into the economy directly. This is quantitative easing. The Bank of England purchases assets (usually government bonds, or gilts) from private sector businesses such as insurance companies, banks and pension funds financed by new money the Bank creates electronically (it doesn’t physically print the banknotes). The sellers use the money to switch into other assets, such as shares or corporate bonds or else use it to lend to consumers and businesses, which pushes up demand and stimulates the economy.
Monetary Policy Committee
A committee designated by the Bank of England to regulate interest rates for the UK. The MPC attempts to keep the economy stable, and maintain the inflation target set by the government and aims to set rates with a view to keeping inflation at a certain level, and avoiding deflation. The MPC meets on the first Thursday of each month and discusses a variety of economics issues and constitutes nine members: the governor, the two deputy governors, the Bank’s chief economist, the executive director for markets and four external members appointed directly by the Chancellor.
An increase in the general level of prices that persists over a period of time. The inflation rate is a measure of the average change over a period, usually 12 months. If inflation is up 4%, this means the price of products and services is 4% higher than a year earlier, requiring we spend and extra 4% to buy the same things we bought 12 months ago and that any savings and investments must generate 4% (after any taxes) to keep pace with inflation. Since 2003, the Bank of England has used the consumer prices index (CPI) as its official measure of inflation (see also retail prices index).
Also referred to as the bank rate or the minimum lending rate, the Bank of England base rate is the lowest rate the Bank uses to discount bills of exchange. This affects consumers as it is used by mainstream lenders and banks as the basis for calculating interest rates on mortgages, loans and savings.