Bank may yet pour more money into the UK economy

The minutes of the Bank of England’s Monetary Policy Committee (MPC) meeting this month suggest that more money may yet be flooded into the economy in an effort to beat off the threat of deflation.

The minutes revealed that the Governor of the Bank, Mervyn King, and two other members of the committee wanted to inject a further £75 billion into the economy. They were outvoted by the remaining six members who settled for an increase of £50 billion.

Even the additional £50 billion of quantitative easing, whereby the Bank buys up assets from the banks and financial institutions in order to boost liquidity and lending, came as a surprise to some observers.

The markets had been expecting an increase of just £25 billion, suggesting that the Bank of England believes that the recession is deeper and the recovery more protracted than had been anticipated.

Mr King appears worried that, with banks still in trouble and with households carrying significant debt, the UK faces the prospect of deflation rather than inflation.

The minutes indicated that, though the extra £25 billion was voted down, the MPC believes that the dangers of injecting too much money into the system outweigh those of introducing too little.

The minutes recorded: “The potential adverse consequences of adding another large monetary stimulus might be less severe than the possible costs of acting too cautiously. [I]f it became apparent that monetary policy had been overly expansive, policy could be tightened by a combination of asset sales and increases in bank rate.”

Analysts suggested that the split within the MPC points to some disagreement over the threat of inflation, but that the Bank has left itself the option of extending quantitative easing yet further.