Bank of England announces new quantitative easing plans

The rate of interest the Bank of England charges other banks to lend money to them will be held at 0.5%, it said.

"While the stimulatory monetary stance and the present level of sterling should help to support demand the weaker outlook for, and the increased downside risks to, output growth mean that the margin of slack in the economy is likely to be greater and more persistent than previously expected," the Bank of England said in a statement.

"In order to keep inflation on track to meet the target over the medium term, the Committee judged that it was necessary to inject further monetary stimulus into the economy."

The Bank of England's Monetary Policy Committee (MPC) meets each month to discuss economic developments independently of government. At this meeting it votes on the Bank Rate, which is the interest rate charged to other banks to allow them to purchase central bank money. This rate can be cut when the Bank of England is concerned about inflation.

When interest rates are almost at zero and cannot be cut further, another option is to increase the quantity of money in circulation through a process called quantitative easing. In quantitative easing, the Bank of England will inject more money directly into the economy by buying assets from private sector institutions such as insurance companies, pension firms, banks or other companies and crediting the seller's bank account. This means the seller has more money to spend or invest further, while the seller's bank has more money 'on reserve' to lend to consumers.

The Bank of England has invested £200bn through its asset purchase programme since March 2009.

In a letter to the Bank of England (2-page / 361KB PDF) authorising the increase, Chancellor George Osborne recognised the "critical role" monetary policy had to play in supporting the economy.

"Further asset purchases provide the MPC with the appropriate tool for with which to address the deterioration in economic conditions, particularly in view of tensions in the world economy that threaten UK recovery," he said.

"Given evidence of continued impairment in the flow of credit to some parts of the real economy, notably small and medium-sized businesses, the Treasury is exploring policy options. Such interventions should complement the MPC's asset purchases," he said.

Alastair Lomax, a specialist in restructuring law with Pinsent Masons, the law firm behind Out-Law.com gave the proposals a tentative welcome.

"Access to capital – or lack of it – remains one of the single most challenging factors for UK businesses seeking to survive and to grow in the current economic conditions. This increased quantitative easing is a welcome move but there remain question marks as to the effectiveness of its firepower - particularly given the extend to which consumer and busienss confidence has drained away during the course of recent months.

His comments were echoed by David Kern, Chief Economist at the British Chambers of Commerce (BCC), who said that the MPC must also consider more "radical" methods.

"There is a strong case for the MPC to help boost bank lending to businesses by immediately raising its purchases of private sector assets. For quantitative easing to be truly effective, it is critical that the additional funds should urgently go into the real economy," he said.

"By confirming that interest rates will not be raised until the end of 2012, as the [Federal Bank] has done in the US, the MPC can help to underpin business confidence. We appreciate that the MPC must be concerned over above-target inflation, but this is likely to fall next year, while the threats to growth are more serious at the present time," he said.