5 Jul 2012

Bank of England prints more cash to boost economy

Another £50bn has been injected into the economy as Britain struggles to climb out of the double-dip recession – but pensioners and savers say they will come off worse.

The Bank of England’s decision to electronically print more money is an attempt to revive the economy, after figures showing UK output has barely grown for a year and a half. There was more bad news, too, for the construction sector, while even services saw their worst performance for eight months.

With few other options, the bank has increased its quantitative easing programme for a third time, taking it from £325bn to £375bn , while holding interest rates at their current record low of just 0.5 per cent.

The cash is used to buy government bonds from banks, in the hope they will then use the funds to make investments or loans, getting the economy moving again. However critics say there is no sign that the banks are keeping their side of the bargain and are still failing to lend to Britain’s struggling small businesses.

Pensioners and savers also say they’ll be unfairly hit by the decision: research from the accountancy firm UHY Hacker and Young has found that the current low interest rates, combined with the bank’s emergency measures, mean savers are losing almost £18bn a year.

Pension annuity rates have also been hit, meaning pensioners will be receiving less in real terms from the policies designed to pay them a regular income when they retire, while pension funds used to finance final salary schemes could also be left even worse off.

Lower retirement incomes

Ros Altmann, director general of Saga group, said: “QE has forced firms to fund their pension schemes and forced over a million pensioners to buy much lower retirement incomes. Low interest rates, high inflation and deteriorating pensions have lowered growth and employment, but the bank has so far failed to quantify the effects.”

And although share prices briefly rose on the news, the bounce didn’t last long, with the FTSE index of leading shares taking a downward turn after a warning from the European Central Bank president about the state of economies across the eurozone.

The ECB voted to reduce its main interest rate by a quarter of one per cent, pushing it below one percent for the first time. Mario Draghi said the unanimous decision came amid concern about the bleak outlook: “We are now seeing a weakening of growth in the whole of the euro area, including countries that had not experienced it before,” he said.

And it looks like Britain may not have seen the last of quantitative easing either, with most experts suggesting that any recovery will be fragile at best. That has not stopped some economists questioning its effect on the “real” economy, and whether issuing successive tranches of cash continue to have the same impact.