BOE increases quantitative easing and holds the base rate

The Bank of England announced today that for the fifth consecutive month the base rate will be held at 0.5%, and that quantitative easing will be increased by £50bn up to £175bn.

The MPC said that in order to keep inflation on track to meet the 2% target, keeping the base rate as it is was the most appropriate action. This was confirmed in a letter to the Chancellor Alistair Darling, where Bank of England governor Mervyn King said the move was essential to meet the central bank’s long term inflation target of 2%.

Retention of the base rate was expected by many, but the increase of quantitative easing measures came as a surprise. Only an additional £25bn had been allocated for quantitative easing, and so the Treasury will have approved today’s move.

The move to increase quantitative easing measures has led some to worry that the asset purchase programme has gone too far and will stoke the fires of inflation too much in coming years. However, with the Bank of England saying that the world economy remains in recession, and despite signs output in the UK’s main export markets is stabilising the UK recession appears deeper than first thought, and this would seem to leave little options but to take further action.

The Bank said its decision to expand quantitative easing was essential to meet its medium term inflation target, and even held out the prospect of a further expansion of the programme later in the year, promising to keep its scale under review.