The Bank of England has expanded its bond-buying program for the first time in almost two years as government budget cuts, combined with Europe’s debt crisis, pose an increasing threat to Britain’s economic recovery.
The Monetary Policy Committee raised the ceiling for its quantitative easing program from 200 billion pounds to 275 billion pounds. The bank expects to complete the new round of bond purchases within four months. The Bank of England last announced an increase in its bond program in November 2009, and purchases from that program ended in early 2010.
Following the announcement, the yield on the U.K.’s 10-year bond fell as low as 2.228% from 2.352% before the statement. The central bank cited slowing global growth and the turmoil in Europe as threatening the U.K. recovery, adding that it is now “more likely” that inflation will undershoot its 2% goal in the medium term. The move comes a day after data showed the U.K. economy barely grew during the second quarter.
“The markets are quite volatile, and during such periods it’s right for the bank to take a firm lead to show they’re in charge of policy and will do what they think is right for the economy,” said David Tinsley, an economist at BNP Paribas SA and a former Bank of England official. “You’d be unwise to assume things would settle down over the next few months.” The bank also held its benchmark interest rate at a record low of 0.5%.