The Bank of England (BoE) has shocked financial experts by expanding it’s quantitative easing plan from the current level of £125bn to £175bn. The surprise decision was based on the Bank’s findings that the UK recession is deeper than at first thought and while there are signs that we are reaching the bottom of the trough and some small signs of recovery, credit restrictions would remain a drag on the economy.
The news has shocked many investors and financial experts who have taken heart from recent economic data suggesting that the UK had battled through the worst and was now about to experience some small growth out of the financial crisis. The news has had an immediate adverse effect on Sterling.
The Bank of England had originally agreed with the government to set a limit of £150bn on the QE programme and the market must now wait a week for the BoE quarterly inflation forecasts report for a further explanation of the decision.
It is a fine balancing act for the BoE, stopping quantitative easing too soon could prolong the pain in the UK economy, while increasing too much will lead to inflation problems in the future. At it’s introduction the BoE admitted that the results of QE could take up to nine months to be appreciated in the economy.
The UK interest rate remains at 0.5%.
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