Bank expands quantitative easing by £50 billion
The Bank of England (BoE) announced today its intention to take the bond-buying programme to £375 billion. The BoE’s Monetary Policy Committee also left the interest rate unchanged at a rock bottom 0.5%, where it has sat for more than three years.
The BoE cites slowing growth in export markets and a depressed economy for the increase in QE.
Weak data was also behind the boost. Wednesday’s purchasing managers’ index for the service sector fell to 51.3, down from 53.3 in May.
Azad Zangana, European economist at Schroders, believes the additional £50 billion will “do little” to stimulate the economy.
“Gilt yields are close to record lows, leaving little room for a further discount to feed through to banks and households. In addition, banks are still under tremendous pressure to deleverage, restricting the amount of lending they are prepared to do.
Moreover, because of the huge uncertainty caused by the eurozone crisis, there is little appetite for businesses to take new risk and invest in the economy,” he says.
Zangana adds that he expects the UK economy to “stagnate at best” over the next 18 months, believing that more QE will be announced later this year.
In addition, more QE means annuity rates are likely to fall further. Andrew Tully, technical director at MGM Advantage, comments: “This latest round of quantitative easing, hot on the heels of the £50 billion announced in February, will further impact gilt yields and will therefore drive down annuity prices.”
Meanwhile, the European Central Bank cut interest rates to a record low of 0.75%.
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.
In exchange for any lump sum – usually your pension fund – an annuity is “bought” from an insurance company and provides an income for life. When you die, the income stops. Annuity rates fluctuate daily and depend on your sex (although from 21 December 2012 insurers will no longer be able to use gender as a factor when calculating annuities), age, health and a number of other factors, so you have to pick the right one and, once bought, its terms cannot be altered, so seek financial advice.