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LONDON (Reuters) - The Bank of England voted to inject more cash into the economy to shore up a fragile recovery and shield the country from fallout from the unresolved euro zone debt crisis.
The central bank said on Thursday it would buy another 50 billion pounds of assets - mostly government bonds - with freshly printed money, taking the total to 325 billion pounds, as economists had expected. The BoE also left its key interest rate at a record-low 0.5 percent.
The cash boost is welcome news for the government, which has come under pressure again to loosen its austerity drive after the economy shrank at the end of 2011 and unemployment hit its highest level in more than 17 years.
"Some recent business surveys have painted a more positive picture and asset prices have risen," Bank of England Governor Mervyn King said in a letter to finance minister George Osborne, explaining the decision.
"But the pace of expansion in the United Kingdom's main export markets has also slowed and concerns remain about the indebtedness and competitiveness of some euro-area countries," he added.
The central bank said inflation would have probably fallen below the target of 2 percent over the medium term without further easing, as a significant amount of unused capacity in the economy was bearing down on prices.
Some improvement in Britons' real incomes was set to support a gradual recovery this year, though the tight credit conditions and the government's austerity measures presented headwinds.
Osborne said the central bank's loose monetary policy continued to play a "critical" role in supporting the economy as he continued his austerity program, and remained the main tool to respond to changes in the outlook.
Sterling rose to a session high against the U.S. dollar while gilts reversed gains on Thursday after the BoE decision.
The BoE surprised markets in October by deciding to restart its program of gilt purchases funded earlier than expected, going on to buy 75 billion pounds' worth of gilts over four months, largely to shield Britain from the euro zone crisis.
This time around, a majority of analysts polled by Reuters had penciled in a 50 billion pound injection over three months. But most were surprised by what the BoE described as an "operational" decision to focus its gilt purchases on slightly shorter maturities than before, to avoid market frictions.
Many economists expect further increases in quantitative easing in May, although they also noted that some policymakers may already have second thoughts about more easing.
"We still think that QE2 has much further to go," said Vicky Redwood from Capital Economics. "There is a chance that today's decision was not unanimous, with those members less convinced that inflation will fall sharply, for example Spencer Dale, perhaps voting to keep the asset purchase program at 275 billion pounds."
The minutes from the two-day Monetary Policy Committee meeting will be released in two weeks, but economists will get an earlier steer when BoE Governor Mervyn King presents fresh quarterly inflation forecasts next week.
Inflation fell from the three-year peak of 5.2 percent in September to 4.2 percent in December, and policymakers have voiced confidence that it will dip below the BoE's 2 percent target later this year, as predicted in November.
With the government's hands tied by its pledge to erase the country's huge budget deficit over the next five years, the onus to boost the faltering economy is firmly on the central bank, though doubts about the impact of its easing continue to linger.
Britain's recovery from a deep slump during the 2008-2009 financial crisis has been weak so far, and the contraction of the economy in the final quarter of 2011 stoked fears of a renewed recession.
But recent surveys indicated that manufacturers and service firms made a surprisingly strong start to the year, and on Thursday data showed that industrial production already rebounded in December from the slump in the previous months.
In addition, the European Central Bank's long-term liquidity operation in December eased banks' funding strains and associated money market tensions.
Additional reporting by Fiona Shaikh and Olesya Dmitracova; editing by Hugh Lawson