The Governor of the Bank of England Sir Mervyn King says this is the ‘biggest financial crisis’ the world has ever faced as the bank increases its quantitative easing programme to £275bn.
Sir Mervyn told Channel 4 News: “This is undoubtedly the biggest financial crisis the world economy has ever faced and it has continued now for four years.
“I do not know when it will come to an end.”
The Bank of England voted to inject £75bn into the UK economy after a series of global shocks including problems in the United States and crisis in the eurozone raised fears of a double-dip recession.
In a statement, the Bank of England said it boosted quantitative easing (QE) because “tensions in the world economy threaten the UK recovery” and the slack in the economy is likely to be “greater and more persistent than previously expected”.
The Bank’s Monetary Policy Committee voted to increase the QE programme, which is effectively printing more money, despite the risks it could pose to inflation rates.
Indeed Chancellor George Osborne has previously criticised the method, when he was in opposition in 2009, as as “leap in the dark” and “the desperate last resort of printing money with all the risks that involves.”
Tensions in the world economy threaten the UK recovery. Bank of England statement
However on Thursday the Chancellor said: “Well, the Bank of England has made an independent judgement that it’s right to commence quantitative easing, and that’s their independent judgement; but I agree with it and that’s why I authorised quantitative easing to proceed.
“It is, as the Governor explains in his letter, a response to the deterioration in the international economy, and it is also a response to the severe strains in the eurozone.”
It is the first change to QE since November 2009. The Bank also kept interest rates at 0.5 per cent.
Separately, the European Central Bank also kept interest rates on hold at 1.5 per cent and is is expected to launch a set of fresh liquidity measures to help European banks weather the eurozone’s worsening debt storm.
The decision was welcomed by business leaders after figures released on Wednesday showed that Britain is recovering from the recession more slowly than previously believed.
Graeme Leach, Chief Economist at the Institute of Directors, said: “What did we want? More QE. When did we want it? Now. Near zero GDP and money supply growth made a compelling case and the Bank of England was right to launch QE2.
“It could be argued that the Bank of England was slow to introduce QE the first time, but thankfully it hasn’t made the same mistake twice.”
Ian McCafferty, CBI chief economic adviser, said the Bank had “acted promptly” in the face of risks to the economic outlook.
He said: “This measure will help support confidence, but we need to recognise that its impact on near-term growth prospects is likely to be relatively modest. Only once the turmoil in the eurozone is resolved will confidence be fully restored.”
A report by the Bank of England into the impact of QE on the economy previously found that the stimulus measure provided a “significant” benefit to growth, helping GDP increase by around 1.5 per cent and 2 per cent – the equivalent of dropping interest rates by between 1.5 and 3 per cent, the Bank said.
However some economists sounded a note of caution, suggesting that QE would not be enough to protect the UK from the wider, global economic pressures.
We don’t think a further bout of QE is going to do much to help. The UK’s economic fate hangs in the hands of the eurozone. Marie Diron, Oxford Economics
Marie Diron, head of European macro services at Oxford Economics, told Channel 4 News: “We don’t think the UK is going to go back in recession, but it is a close call.
“But we don’t think a further bout of QE is going to do much to help. Interest rates are already low and the UK’s economic fate hangs in the hands of the eurozone.”
Professor Mike Wickens from the University of York, speaking to Channel 4 News, added: “My immediate reaction to the Bank’s move was that if it is as successful in increasing bank lending as past QE then it will be a waste of time.
“The banks have lots of money to lend already but are reluctant to do so. And when they are willing to make loans they seem to charge high borrowing rates which discourages borrowers.”