(RTTNews) - Thursday, the Bank of England maintained its key interest rate as expected and raised the size of its quantitative easing measures by GBP 25 billion to aid the ailing economy.

The Monetary Policy Committee, led by Governor Mervyn King, raised the size of the asset purchase scheme by GBP 25 billion to GBP 200 billion. The central bank was widely expected to increase the QE measures by GBP 50 billion. The MPC now expects the asset purchase scheme to take three months to complete and decided to keep the scale of the programme under review.

The central bank maintained the official Bank Rate paid on commercial bank reserves at 0.5%. This has been the lowest rate since the bank was established in 1694. The previous change in rate was a reduction of 0.5 percentage points in March 2009.

“In the light of the Committee’s latest Inflation Report projections and in order to keep inflation on track to meet the 2% inflation target over the medium term, the Committee judged that maintaining Bank Rate at 0.5% was appropriate”, the central bank said in a statement. The MPC’s latest Inflation Report is set to be released on November 11.

Reflecting higher petrol price inflation and the reversal of last year’s reduction in VAT, the BoE said inflation is likely to rise sharply to above the 2% target in the near term. In September, annual inflation had slowed to a five-year low of 1.1% and stood below the central bank’s target for the fourth straight month.

The British economy failed to exit recession in the third quarter, while other major economies already showed signs of recovery. The economy is undergoing its longest streak of contraction on record, with preliminary data showing a 0.4% sequential fall in the third quarter. However, a number of indicators of spending and confidence now suggest that a pickup in economic activity might soon be evident, the central bank noted.

The medium-term prospects for output and inflation continue to be determined by the balance between two opposing sets of forces, the BoE said. On the one side, there is a considerable stimulus still working through from the substantial easing in monetary and fiscal policy. On the other hand, the need for banks to continue the process of balance sheet repair is likely to limit the availability of credit. According to the bank, the prospect is for a slow recovery in the level of economic activity, so that a substantial margin of under-utilized resources persists.

Chancellor of the Exchequer Alistair Darling and BoE Governor King exchanged letters about the latest expansion of the Asset Purchase Facility. Darling agreed that an increase in the ceiling would provide the MPC with scope to vary the stance of monetary policy to meet the inflation target.

James Knightley, economist at ING said, “We suspect this will mark the last stimulus effort from the BoE with the next move being rate hikes, possibly starting in August after the BoE has assessed the impact from any potential fiscal policy changes in the wake of next year’s election.” Knightley holds the view that rates may be raised a little more quickly that the market is pricing. “The eventual peak will be relatively low at around 4% given a much tighter fiscal environment and the ongoing consumer headwinds of unemployment and deleveraging.”

The quantitative easing measures were initiated on March 5, with the BoE launching a GBP 75 billion asset purchase programme using central bank reserves. Later on, the measure was raised to GBP 125 billion on May 7 and then to GBP 175 billion on August 6.

Commenting on the decision, Commerzbank analyst Peter Dixon said it generally takes 12 to 18 months for rate cuts to have a full impact on the economy, and it may take even longer for a quantitative easing strategy to have much effect. “However, we suspect that there must be some disappointment amongst MPC members that the economy is not showing more robust signs of activity at this stage,” added Dixon.

At the August meeting, policy makers were split over the amount by which the asset purchase has to be increased. King, Tim Besley and David Miles sought a GBP 75 billion increase to GBP 200 billion. But, all policy makers stood united in maintaining the size at GBP 175 billion in the succeeding meetings. The central bank is set to release the minutes of the meeting on November 18, which will show whether policy makers were split over extending QE measures.

According to the British Chambers of Commerce, the latest MPC action will help economy. But the lobby urged the MPC to take forceful policies to end the recession as soon as possible. “The current measures, though helpful, will have to be supplemented with additional steps, and QE will have to be increased further,” David Kern, Chief Economist said.

Elsewhere, the Confederation of British Industry noted that there are some tentative signs that QE has had a positive effect on the economy, although it is difficult to know the extent of the impact of the such measures.

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