Ailing Britain's central bank turns money taps back on

Thu Jul 5, 2012 10:16am EDT
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By David Milliken and Sven Egenter

LONDON (Reuters) - The Bank of England launched a third round of monetary stimulus on Thursday, saying it would restart its printing presses and buy 50 billion pounds of government bonds with newly created money to help the economy out of recession.

The BoE's action, coming just two months after it ended a previous asset buying program, coincided with interest rate cuts in China and the euro zone as the trio of central banks took steps to counter a global economic slowdown.

There is no guarantee the new cash injection, which the bank linked directly to the worsening backdrop in the euro zone, will offer a major boost to an economy officially in recession since late last year.

BoE Governor Mervyn King has been adamant that gilt purchases still work as a stimulus.

But policymakers Martin Weale and deputy governor Paul Tucker as well as external economists have voiced doubts about the effectiveness of the latest round of purchases, though some in the market still forecast the four-month program would be extended.

"We continue to have doubts over how successful extra QE will be, but seeing as the BoE has few other options we expect them to stick with it," said James Knightley at ING.

The BoE bought 125 billion pounds of gilts between October and April, calling a halt in May largely because inflation was falling more slowly than hoped towards its 2 percent target.

Since then, inflation has dropped to 2.8 percent, and the BoE said a worsening economic situation in the euro zone was the main factor behind its decision to restart purchases.   Continued...

The Bank of England is seen against a blue sky, London June 15, 2012. REUTERS/Paul Hackett