Thursday, September 6, 2012

Bank of England maintains 0.5% rate, QE target

    The Bank of England (BoE) kept its official bank rate unchanged at 0.5 percent, as widely expected, and maintained its current target of purchasing assets worth a total of 375 billion pounds.
    The BoE said in a statement following a two-day meeting of its Monetary Policy Committee that it expected to complete its asset purchases, also known as quantitative easing (QE),  in two months.
    The British economy is currently in recession, with gross domestic product (GDP) shrinking 0.5 percent in the second quarter from the first quarter, following quarterly declines of 0.3 percent in the first quarter and 0.4 percent in the fourth quarter.
    The inflation rate in July rose to 2.6 percent from 2.4 percent but the BoE expects inflation to recede toward its target of close to 2 percent by the end of the year.
    The BoE has held its key lending rate at a record low 0.50 percent since March 2009, when it also started purchasing assets, such as bonds, by issuing central bank reserves to add further liquidity to the economy.
    In July the BoE expanded its QE target by 50 billion pounds to 375 billion. The bank said then that it expected to complete the asset purchases by November.

    The BoE launched its QE program because it was worried that inflation would undershoot its target without the extra money that is injected directly into the UK economy, bypassing the banking system. 
    Under QE, BoE electronically creates new money and uses this to purchase UK government bonds, known as gilts, directly from private investors, such as pension funds, insurance companies or other non-financial firms. 
    As interest rates are very low, the BoE expects these investors to use the cash they receive for their gilts to purchase other assets, such as corporate bonds or shares. This should lowering borrowing costs for companies and encourage the issuance of new shares and bonds.
    In addition to QE, the BoE and UK government started a Funding for Lending scheme in June, making 80 billion pounds worth of cheap loans available to households and businesses.



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