The Bank of England is to pump another £50bn into the British economy, taking the total monetary stimulus since March 2009 to £375bn.
Quantitative easing expanded
Chancellor George Osborne has described the latest round of quantitative easing as ‘supporting the economy’, but the move has been criticised by the National Association of Pension Funds which called it ‘harmful’.
Originally undertaken as a response to the ‘credit crunch’ in 2009, quantitative easing was intended to stimulate the British economy, together with interest rate cuts. The Bank of England base rate has been at an all-time low of 0.5% ever since and was maintained at that rate by the Bank of England today.
The Governor of the Bank, Sir Mervyn King, announced a further £50bn of asset purchases, beginning in July and continuing for the next four months. This will take the total committed to quantitative easing to £375bn.
Economic weakness continues
In a letter to the Chancellor, King explained that: ‘UK output has barely grown for a year and a half and is estimated to have fallen in both of the past two quarters. The pace of expansion in most of the United Kingdom’s main export markets also appears to have slowed. Business indicators point to a continuation of that weakness in the near term, both at home and abroad.’
Pensions under pressure
The mechanism of quantitative easing, whereby the Bank of England buys assets on the open market- principally gilts, has been criticised by the National Association of Pension Funds (NAPF) as posing a double threat to pension incomes.
NAPF Chief Executive Joanne Segars said: ‘The economists might argue about whether QE works, but there is no doubt that it short-changes businesses running final salary pensions, and people who are about to retire.
‘QE worsens the yield on gilts, which increases the deficits of final salary pension funds and means people get a worse rate on their annuity. Those who are retiring could be locked into a weaker pension for the rest of their days.’