Bank Of England Pumps £75bn Into Economy

The Bank of England has voted to extend its programme of quantitative easing, signalling a real fear that the UK is on the brink of a new recession.

There had been growing support within the Monetary Policy Committee (MPC) for a new round of asset purchases to boost money supply.

The nine-man panel decided to extend the quantitative easing (QE) scheme beyond the current £200bn by another £75bn over the next four months, saying: "Tensions in the world economy threaten the UK recovery."

Reaction was immediate, with the pound hitting a 14-month low against the US dollar.

The markets were said to be 'surprised' by the timing and scale of the announcement.

As expected, there was no change to the base rate of interest, which has now remained at its historic low of 0.5% for 31 months.

QE effectively means printing more cash to buy assets - such as Government and corporate bonds - which are then sold to allow new money to enter the economy.

It is the first time the Bank has extended QE since November 2009 and suggests that worries have grown about the UK's economic prospects within the MPC.

The committee, which can request advance data from bodies such as the Office for National Statistics, took the decision despite the risk of stoking inflation which remains well above double its target, at 4.5%.

Utility bill increases are expected to take the CPI inflation measure to 5% by the end of the year.

The Sky News Money Panel, along with most economic commentators, had expected the MPC to hold off until the first estimate of GDP for the third quarter was released later this month.

Former MPC member Andrew Sentance had told Sky News yesterday that a rise in QE would, in his view, fail to boost the economy and raise inflation.

The Bank of England had previously estimated that its first round of QE boosted UK GDP by the equivalent of up to 2%.

The move was widely welcomed within business groups and by the Chancellor though Labour and the TUC suggested it was proof the Government's policies were not working.

There was anger from savers - with lobbyists saying the QE extension would aggravate pensioner poverty by deepening the squeeze on those who had already been hit by low returns on their deposits, while seeing their living costs rise.

In a separate development, the European Central Bank kept its core interest rate at 1.5% despite pressure to aid growth through a cut.

The move was discussed but it was decided instead to help boost bank liquidity through measures including access to one year loans .

Banks are threatened with losses from a potential default on government debt by Greece and in a separate development, shares in troubled Franco/Belgian bank Dexia have been suspended - potentially signalling an announcement about its future.

Dexia and others have been struggling to fund their day-to-day operations and remain dependent on last-resort loans from the ECB.

The ECB meeting was the last chaired by Jean-Claude Trichet before he is replaced by the head of Italy's central bank.

The monetary policy announcements helped boost the markets, which had already risen on fresh hopes of political intervention to ease the wider debt crisis.

As trading closed, the FTSE 100 share index was up 3.7% while there were similar gains on Germany's DAX (3.1%) and on the CAC 40 (4.4%) in Paris.

In New York, The Dow Jones Industrial Average opened 0.5% lower but later moved into positive territory following the ECB policy decision. At 5pm, it was at 0.9%.