February 9, 2012

BoE Boosts QE

Adds another $66 billion to economy, keeps interest rate unchanged

The Bank of England has injected another 50 billion pounds ($66.271 billion) into the British economy as it extended its quantitative easing program. Its monetary policy committee also opted to maintain its benchmark interest rate unchanged at 0.5%.

The BBC reported Thursday that BoE began its QE program in 2009 in the hopes of stimulating the British economy. Experts expected that the bank would flood markets with another 75 billion pounds, but the figure dropped after stronger-than-expected performance by the manufacturing and service sectors in January.

In a statement, the bank said, "The underlying pace of recovery slowed during 2011, with activity falling slightly during the final quarter. Some recent business surveys have painted a more positive picture and asset prices have risen. But the pace of expansion in the United Kingdom's main export markets has also slowed and concerns remain about the indebtedness and competitiveness of some euro-area countries."

BoE also said that if it had not taken the action, inflation would probably drop from its current 4.2% to below its 2% target, as increasing unemployment and dropping import and energy prices continued to fall, and as the VAT, boosted last January from 17.5% to 20%, also fell compared to the previous year.

The pension industry was highly critical of the action. Joanne Segars, CEO of the National Association of Pension Funds, said that QE lowered the value of pensions. She was quoted saying, "Retirees who get locked into a weak annuity will find that the Bank's money printing leaves them out of pocket for the rest of their lives. For the companies that run final salary pensions, QE is a headache, which pushes their pension funds further into the red. This means businesses have to put more money into their pension schemes, instead of spending it on jobs and investment. Our fear is that firms struggling with a weak economy will simply choose to close their pension schemes."

Simon Gompertz, the BBC News personal finance correspondent, said in the report, "QE makes annuities shrink. You get 25% less now than you did three years ago. The downward effect of QE on pensions happens because the annuity income you are promised tracks the interest rate the government pays on its debts. These interest rates are already low and QE pushes them even lower."

U.K. pension expert Ros Altmann, director-general of the Saga Group, said of the move, "I don't see how making pensioners poorer is going to stimulate the economy."

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