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Thursday, May 7, 2009

BoE increases QE program, leaves rates on hold

LONDON (Reuters) - The Bank of England said on Thursday it would increase the size of its asset purchase program by 50 billion pounds to 125 billion pounds, and left interest rates at a record low 0.5 percent for a second month.

The central bank has already bought more than 50 billion pounds of assets, mainly government bonds, to boost the recession-bound British economy. It had been on track to complete the original program of quantitative easing by early June at the latest.

The pound fell and gilt futures rallied strongly after Thursday's announcement, halving earlier losses as the decision calmed nerves that the Bank might have suspended the program at the end of this month.

"There's no surprise that Bank Rate was held at 0.5 percent; however we are a little taken aback by the decision to increase the quantitative easing target by 50 billion pounds," said economist Philip Shaw at Investec.

"We had thought it more likely the Monetary Policy Committee would sit and wait to assess the impact of the existing program rather than expand it right away."

The central bank has cut interest rates by a total of 4.5 percentage points since October as Britain's economy plunged into its first recession since the early 1990s.

The Bank said on Thursday it would take a further three months to complete the program and that its scale would be kept under review.


Stimulus measures taken to revive a recession-hit economy would work, but it was not clear how quickly the upturn would come, the Bank said in a statement. It said it expected inflation to fall below its two percent target later this year, having stood at 2.9 percent in March.

"That stimulus should in due course lead to a recovery in economic growth, bringing inflation back toward the 2 percent target. But the timing and strength of that recovery is highly uncertain," the Bank said.

Britain's economy shrank at its fastest pace since 1979 in the first three months of this year, and looks set to record its worst full-year performance since World War Two.

However, recent surveys suggest the pace of decline is slowing. Consumer confidence has picked up markedly over the past two months, equity prices have jumped by a fifth and money market strains appear to be easing.

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