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.
"Without additional monetary stimulus, it was more likely than not that inflation would undershoot the target in the medium term," King said in a letter to finance minister George Osborne explaining the decision.
The BoE has bought 325 billion pounds of government bonds to date, and the purchases announced on Thursday take this total to 375 billion.
Many economists had expected new program to be spread over less than four months, and a minority had forecast the BoE would plan to buy 75 billion pounds of bonds.
Gilt futures, which had rallied in the run-up to the decision, fell by more than 30 ticks to hit a session low after the data.
"We continue to expect that QE will be expanded markedly further over time, reaching a total of about 500 billion pounds," said Citi economist Michael Saunders, who had expected an initial dose of 75 billion.
Britain's Conservative-Liberal Democrat coalition is largely reliant on the BoE to boost the economy because it has limited scope to cut taxes or raise spending while it tries to eliminate the country's big budget deficit over the next five years.
In a letter authorizing Thursday's QE expansion, finance minister Osborne confirmed that monetary policy was the "primary tool" to deal with a worsening economic outlook.
However, many economists think gilt purchases are losing the effectiveness they had when they first started in March 2009.
"The BoE has been excessively optimistic about how powerful QE is," said Philip Rush, an economist at Nomura. "The latest increase is more than just a token, but it is not hugely significant for the outlook for growth and inflation."
Some BoE Monetary Policy Committee members have doubts too, and recommended at last month's meeting - when the committee split 5-4 against restarting QE - that other complementary policy measures might be better suited to reducing firms' and households' borrowing costs.
The QE stimulus follows joint measures announced by the government and BoE last month to improve the flow of credit to businesses, and to ensure banks do not suffer from a lack of ready cash if the euro zone crisis deepens.
The BoE says its purchases of government bonds help the economy by encouraging other investors to buy riskier assets instead, making it easier for large companies to raise funds through bond or share issues. But critics argue the BoE needs to do more to boost the flow of credit to smaller companies.
"The last round of QE proved ineffective, with little or no evidence it found its way to small businesses - the engine room of our economy," said Phillip Monks, chief executive of Aldermore, a recently established bank that lends to business.
"To really stimulate economic growth, the Bank of England needs to do more to ... ease credit availability for small firms."
With the possibility of interest rate cuts yet to enter the debate in Britain, both the European Central Bank and the People's Bank of China cut borrowing costs on Thursday.
Additional reporting Fiona Shaikh, Jonathan Cable, Paul Sandle, Sophie Kirby, Kate Holton; editing by Jeremy Gaunt, John Stonestreet