European central banks intensified their efforts to combat the recession on Thursday with bolder decisions than expected to boost lending and cut interest rates to fresh lows.
The Bank of England said it would pump £50bn into the UK economy in a substantial expansion of its programme of government bond purchases, while the European Central Bank cut its main interest rate by a quarter percentage point to 1 per cent, the lowest yet.
Furthermore, the ECB announced plans to buy €60bn (£54bn) of covered bonds, a form of long-term debt issued by banks that is usually secured against mortgages and the bank itself.
The moves by the Bank of England, which kept its interest rate on hold at 0.5 per cent, came in response to what it described as a “substantial margin of spare capacity in the economy”, which it said threatened to keep inflation too low.
As part of its quantitative easing, or creating money to buy assets to help lower interest rates and encourage spending, the Bank has already purchased a little over two-thirds of its initial target of £75bn of government bonds and other assets, equal to 5 per cent of national income.
By committing to another £50bn of asset purchases, the Bank signalled it needed to do more to ensure the economy would recover and inflation did not fall too low.
The Bank’s monetary policy committee said it could see signs that the pace of decline had begun to moderate and hoped the economic stimulus “should in due course lead to a recovery in economic growth, bringing inflation back to the 2 per cent target”, though it added that “the timing and strength of that recovery is highly uncertain”.
In a sign that quantitative easing was reducing corporate borrowing costs and raising bond prices, the Bank declined to buy any corporate bonds offered to it in Thursday’s auction.
But risk-free interest rates on government bonds around the world continued to rise on Thursday, with the yield on 10-year gilts closing higher at 3.68 per cent, higher than the level before the quantitative easing programme started in early March.
Yet UK government bond yields rose less than those of continental European governments, indicating that bond markets viewed the Bank’s moves favourably compared with those of the European Central Bank.
The ECB’s actions reflect its gloom over the outlook for the eurozone, which is expected to be hit worse by the slowdown than the US or UK. The euro rose 1.4 per cent against sterling as traders viewed the bolder plans by the Bank of England as creating more inflationary pressures than the ECB’s more cautious moves.
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