Quantitative easing to continue

So just if we didn't know that the UK economy was teetering on the brink,this lunchtime's news that the Bank of England is to inject a further £50bn into the economy through the mechanism known as Quantitative easing.

Announcing that interest were to continue at 0.5 per cent where they have been now for over three years,the measure now takes the total asset purchases that the bank has made from £275bn to £325bn since it first introduced the measure to ward off the threat of fiscal meltdown.

The critics are still out on this policy.It is technically printing money and putting it back into the economy which can lead to inflation,if demand was increasing but the fact that it hasn't and that the Bank of England continues to do it, merely illustrates the dire situation that we are in.

It is worth reading Daniel Knowles piece on the Telegraph blog where he explains the economics behind it

The reasoning behind the Bank's move you can read Here but suffice to say that the bank has concerns that 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

Rocky outlook for the UK economy says Bank of England governor

On top of this morning's unemployment figures the Bank of England have now added to the general gloom and despair in the UK economy.

At the launch of the Bank's inflation report Governor Mervyn King said that the outlook for growth of the world economy has worsened since August and that in the UK activity could be broadly flat until around the middle of next year.

The Bank has downgraded its growth forecasts to 1 per cent both this year and next - down from 1.5 per cent and 2.2 per cent respectively.

On the bright side the Bank is confident that inflation will fall sharply at the start of next year as the contributions of VAT, energy and import prices decline.

The extent and pace of the fall, however, remain uncertain said the governor in his opening address.

A key uncertainty surrounding the outlook for inflation concerns the impact of the financial crisis on the level of potential output in the UK economy, and for how long any adverse impact might persist.

According to their figures,measured productivity is around 10 per cent lower than would have been the case had it risen on its pre-crisis

King added that External factors are providing an unwelcome drag on growth in our economy, adding to the headwinds that we already face in the process of rebalancing towards a sustainable path of recovery.

Over regulation the FSA way

The FSA have been widely criticised for their role in the financial crisis especially in failing to see the problems at Northern Rock and RBS.

Fintag explains what the problem may be

One of the reasons I want to leave the UK is the FSA. I was fined yesterday (and I take this personally because its my income they are stealing). I didn't get an FSA return in on time. Its FSA018a Pillar 1 or something. We used to send in quarterly returns. And then one at the year end. There were 2 return templates and it took 10 minutes for them to be printed out from our Sage 50 accounting system. Now someone has to type them in to a website and remember to do so which is often when the moon is full and Big Ben has struck 13.

It will be remembered that regulation was taken from the Bank of England on its independence back in the heady days of 1997.

Fintag continues

In this new world of over regulation, we now have nearly 50 reports to complete on line. Most are not applicable but you have to verify just in case. Our compliance legal team have to check radio buttons and fill in fields to questions like "Do you have PI?" or "How much capital have you put aside in case there is an earthquake?".

Now renmind me who was responsible for this.....Ah Yes it was Ed Balls now in charge of children

One theory doing the rounds

Sam Coates has an insight into the apparent falling out of the Bank of England and the government.

One theory doing the rounds in government is that Merv was actually trying his hand at a touch of media management. The Governor nailed his intellectual sails to the quantitative easing mast, believing that printing money is needed to avoid deflation. But yesterday's CPI figures came as a worrying shock to Merv - 3.2 per cent. So he needed to create a distraction, to avoid questions being asked about his own decisions. Hence his little present for Gordon at the Treasury Select Committee yesterday. That, as I say, is one theory being talked about in Whitehall.

The final throw of the dice?

So as expected the Bank of England has cut interest rates to half a per cent and has announced plans for quantitative easing amounting to £75b.

Interest rates have now been cut six times since October but their cutting has had little effect on the bank's willingness to lend money and has irked those that rely on the returns savings and investments for income.

This new policy will be a last chance to kick start the money supply and those green shoots.

Peston questions whether the Bank Of England can maintain its independence

It is worth reading Robert Peston's blog as he talks about the the threat to the Independence of the bank of England as the recession continues.

Its Independence was the plank on which new Labour laid the economic growth of the past ten years but according to Peston,

Can the Bank of England's autonomy over monetary policy, its independence
from political interference, be sustained as the Bank Rate approaches
zero?

He argues that

the Bank of England is about to start using measures other than movements in its policy interest rate to influence the interest rates actually paid by businesses and households and to increase the stock of money in the economy.

Cable has some radical proposals

I am not sure whether Vince Cable is correct in his assertion that the Bank of England's independence should be taken away on a temporary basis whilst we get through the worst of the financial crisis.

Speaking on Andrew Marr this morning in a three some with George Osbourne and Alistair Darling( is this the new face of inter party cooperation?),he felt that desperate times called for desperate measures.

It was interesting that Osbourne was not in agreement.Cable thinks that it must be deflected form its inflationary goal but as Alistair Darling pointed out it also has the remit for supporting the government's economic policy.

Cable reiterates his proposal in the Sunday Times this morning

Leadership will not come from a committee of economic ministers standing behind the chancellor, debating where to steer and fighting for control of the tiller. There has to be a sense of policy direction. Fortunately there are lessons to be learnt from previous financial tsunamis.

He calls for an immediate cut in interest rates of 2 percentage points and on Marr's show said that quarter or half percentage cuts were inadequate.

History teaches us that interest rates should be slashed during a banking crisis to stave off deep recession. This has happened in the United States, but not in Britain. The approach of the Bank of England’s monetary policy committee, dictated by its mandate, is to balance deflationary against inflationary risks with, in practice, occasional small adjustments in interest rates. The committee is in danger of becoming irrelevant in an environment where short and medium-term inflationary risks are massively outweighed by the danger of a once-in-a-lifetime collapse of the financial system

Panic stations or solid policy?

The Bank of England's decison to cut interest rates this lunchtime to 5.25% suspense was no doubt a response to the credit crunch and the recent fall in stock markets.

Is it sensible economic policy?Well perhaps this knee jerk reaction by the bank has more to do with instilling confidence in the great British public rather than any sound long term economic planning.

According to BBC online news,its accompnying statement said

"Inflation at 2.1% in December was close to the 2% target, but higher energy and food prices are expected to raise inflation, possibly quite sharply, in the coming months."

adding that

The Committee needs to balance the risk that a sharp slowing in activity pulls inflation below target in the medium-term against the risk that elevated inflation expectations keep inflation above target

I always doubted the inflation figures,but surley all this cut is going to do is to once again fuel credit growth and house price inflation,things that got us in this mess in the first place