This seemed inevitable but it must stop soon or repayments will stretch out to the ‘crack of doom’. Clearly the markets believe this will be the end.
Over at the ECB the report is that ----
“Trichet hints at end to ECB moves to pump more money
European Central Bank chief hints strongly that emergency measures to pump more money into the euro economy will start to be withdrawn.”
Christina
TELEGRAPH 5.11.09
1. Bank of England primes money presses for another £25bn to fight recession
The Bank of England has opted to pump more money into the economy in a clear sign that it does not believe that Britain is out of the woods yet.
By Angela Monaghan
The Bank's Monetary Policy Committee voted to extend its programme of quantitative easing (QE) by £25bn to £200bn as it stepped up the fight against the most severe recession the country has faced in post-war history. It left interest rates unchanged at the historically low level of 0.5pc.
In a statement accompanying the decision, the committee said the UK economy had undergone a sharp contraction, but there were signs that the situation “may soon” improve.
“In the United Kingdom, output has fallen by almost 6pc since the start of 2008. Households have reduced their spending substantially and business investment has fallen especially sharply. Gross domestic product continued to fall in the third quarter. A number of indicators of spending and confidence, however, suggest that a pickup in economic activity may soon be evident,” it said.
The MPC said it would take three months to complete the additional £25bn of spending on Government and corporate debt, and said the scale of the programme would be “kept under review”, leaving the door open to a further extension in the future.
Economists had predicted an increase, although they were divided on whether it would be a rise of £25bn or £50bn. The interest rate decision was also expected.
“The Bank’s decision comes on the back of evidence that the UK economic recovery remains fragile,” said Charles Davis, senior economist at the Centre for Economics and Business Research.
The MPC had shared the widely held belief that the UK recession ended in the third quarter, and was therefore shocked when the Office for National Statistics said last week that the economy actually shrank by 0.4pc over July to September, prolonging the recession.
The data indicated that the economy had not rebounded as expected, and heightened fears about its underlying weakness. Experts therefore expected the move despite evidence this week that the economy got off to a strong start in the fourth quarter.
“There is no “plan B”. The UK economy is still in the High Dependency Unit, but without QE it might have been in Intensive Care, or worse,” said Stephen Boyle, head of economics at the Royal Bank of Scotland. “The extension of the Bank’s asset purchase scheme today reminds us that the risks of doing too little considerably outweigh the risks of doing too much.”
It was the first increase in QE since August, when the committee expanded the programme by £50bn to £175bn. At that point Mervyn King, the Bank’s Governor, and two fellow MPC members had voted for a bigger extension to £200bn, but were overruled by the remaining six members of the committee.
“Today’s decision is a clear vindication for Governor King, MPC member Miles and ex-member Besley,” said Colin Ellis, economist at Daiwa Securities.
The decision was welcomed by representatives of the business community.
Ian McCafferty, CBI Chief Economic Adviser, said: “The Bank has recognised that the economic situation is still very fragile, and we welcome its decision. Extending quantitative easing ought to provide an extra degree of support for business and consumer confidence.”
David Kern, chief economist at the British Chambers of Commerce, said: “We are pleased with the decision to increase the QE programme to £200bn, but disappointed that the MPC has not taken more specific measures aimed at stimulating bank lending to companies. The current measures, though helpful, will have to be supplemented with additional steps, and QE will have to be increased further.”
The pound strengthend after the decision, signalling relief that the MPC did not feel a bigger cash injection was necessary.
2. BoE: It ain’t over till it’s over
By Edmund Conway
Well it may be the beginning of the end, but the money-printing blizzard pioneered by the Bank of England still has at least another three months to go. In the end, the Governor, Mervyn King, has got his wish – the total amount of money the Bank’s Monetary Policy Committee is set to create out of thin air will now reach £200bn.
[How did the gilts markets react. The yield on the 10 year government bond shot up quite a bit following the decision, suggesting that many market participants had bet that the Bank would do more in the way of QE paraphrased to elminate too-small-to read graph!]
It is hard to conceptualise how much this eye-watering sum amounts to, so think about it this way. With the “mere” £25bn of extra cash the Bank has just agreed to create between now and February, you could go out and buy the entire shareholdings in Morrison’s, J Sainsbury, Marks & Spencer and Kingfisher, and still have change for another smaller retailer – say, HMV. That £200bn is almost equivalent to the entire annual economic output of Denmark.
However, the pace of the purchases has slowed to its most sluggish since the start of the programme back in March. In its early stages, the Bank was buying almost £6bn worth of debt (almost exclusively government bonds) every week. That slowed to around £4bn more recently and now, with yesterday’s decision, will drop to around £2bn a week. Still nothing to be sniffed at, but low enough that we will soon start getting a sense of how much private sector appetite there is out there for gilts. After all, in the past six months, the Bank has, when you net things out, bought effectively everything the Government has been issuing.
The decision comes, as ever, with a statement. Some highlights:
The world economy has shown signs of recovery, with a number of emerging market economies experiencing a strong rebound in growth, although global activity as a whole remains significantly depressed. Asset prices have risen internationally since the spring, reflecting both the gradual improvement in the economic climate and accommodative monetary policies. And banks’ funding conditions have improved, though financial conditions remain fragile…
The medium-term prospects for output and inflation continue to be determined by the balance between two opposing sets of forces. On the one hand, there is a considerable stimulus still working through from the substantial easing in monetary and fiscal policy. The Bank’s asset purchases have helped to boost asset prices and improve access to capital markets. The sterling effective exchange rate lies around a quarter below its mid-2007 level, improving the competitiveness of UK producers. On the other hand, 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. On balance, the Committee believes that the prospect is for a slow recovery in the level of economic activity, so that a substantial margin of under-utilised resources persists. That will continue to bear down on inflation for some time to come, offset in the short run by the impact of the past depreciation of sterling.
There is also a letter from the Governor to the Chancellor (as he is bound to do if he wants to change the total scale of QE).
One interesting aspect of the Chancellor’s reply letter is that he mildly rebukes the Governor for the fact that the Bank still has yet to buy any of the secured commercial paper it pledged to start buying up back in August, saying: “There has been a welcome improvement in the markets for Commercial Paper and for investment grade Corporate Bonds since the start of the year, partly reflecting the support provided by the Facility. I would welcome an update on the prospective use of the secured commercial paper facility.”
So, given that the UK is still in recession, that the Federal Reserve last night indicated that it too is likely to leave monetary policy loose for some time, given the scale of the credit crunch still facing the UK as banks rebuild their balance sheets, it is probably not too much of a surprise that the Bank extended QE.
The truth, however, is that – bar those dismal gross domestic product figures last week which showed the UK was still in recession – almost all of the other economic news in recent weeks has been remarkably positive. This goes for the purchasing managers’ indices for both manufacturing and services sectors. It goes for house prices which, according to Nationwide are now higher than at the start of the year (who, honestly, would have imagined that back in the months after the Lehman Brothers collapse? Not me, for one). On top of all of that we learnt this morning both that car sales have risen by a third (thanks to the scrappage scheme) and that industrial production has now bounced back at the fastest rate since July 2002.
Now the worry concerns the creation of asset bubbles due to near-zero interest rates in the UK, the US and beyond. The time for the exit strategies – or, as I prefer to call them, re-entry strategies – is drawing closer. [That equals a rough ride ahead - fasten your seat belts. -cs]
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