The Bank of England's Monetary Policy Committee today voted to reduce the official Bank Rate paid on commercial bank reserves by 50 bps to 0.5%, and to undertake a program of asset purchases of 75 billion pounds (~$105 bln US) financed by the issuance of central bank reserves.
World activity continued to weaken, reflecting both depressed confidence and the persistent problems in international credit markets. In the United Kingdom, output dropped sharply in Q4.
That reflected lower consumer spending, a further fall in business investment and a rapid run-down in stocks, in part offset by stronger net exports as the past depreciation of sterling began to take effect. CPI inflation declined to 3.0% in January.
The depreciation of sterling is adding to imported cost pressures, but pay pressures continue to wane. Inflation is likely to fall below the 2% target by the second half of the year.
At its March meeting, the Committee noted that the February Inflation Report had implied a substantial risk of undershooting the 2% CPI inflation target in the medium term and that a further easing in monetary policy was likely to be needed. Data released since the finalisation of the Report had not materially altered that prospect.
The Committee agreed that the Bank should, in the first instance, finance 75 billion pounds of asset purchases by the issuance of central bank reserves.
The Committee recognised that it might take up to three months to carry out this program of purchases. Part of that sum would finance the Bank of England's program of private sector asset purchases through the Asset Purchase Facility, intended to improve the functioning of corporate credit markets.
But in order to meet the Committee's objective of total purchases of 75 billion pounds, the Bank would also buy medium- and long-maturity conventional gilts in the secondary market. It is likely that the majority of the overall purchases by value over the next three months will be of gilts.