Sir Mervyn King believes the Bank and the Government have done everything they can October 7, 2011
The most serious financial crisis Britain has ever seen
Britain is in the grip of its worst financial crisis since the 1930s, “if not ever”, Sir Mervyn King, the Governor of the Bank of England, admitted as another £75 billion was pumped into the economy to boost recovery.
The unexpected move was the clearest sign yet that the nation could be facing a double-dip recession.
It followed a gloomy assessment from David Cameron at the Conservative Party conference this week when the Prime Minister said the threat to the world economy was “as serious today as it was in 2008 when world recession loomed”.
As Sir Mervyn took to the airwaves to explain the second injection of quantitative easing – so-called QE2 – the Governor, in stressing how there had to be “collective” international action, appeared to admit there was now little or nothing more the Bank or the UK Government could do. “We’ve done what we can in the UK,” he said.
The first injection of QE came in November 2009 when £200bn was electronically printed. Analysis found it boosted GDP by as much as 2% and was the equivalent of dropping interest rates by between 1.5% and 3%. But it also raised inflation and pushed down the pound.
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The right thing to do at present is to create some more money to inject into the economy
The Bank’s Monetary Policy Committee said its members had decided on QE2 now because the slack in the UK economy would likely be “greater and more persistent than previously expected”.
Sir Mervyn said: “This is the most serious financial crisis we’ve seen at least since the 1930s, if not ever. We’re having to deal with very unusual circumstances and to act calmly and do the right thing. The right thing at present is to create some more money to inject into the economy.”
Pensioner groups and lobbyists said the Bank of England’s decision was “a Titanic disaster” for savers, who have already seen the value of their hard-earned investments fall.
However, Sir Mervyn said the action was necessary because the world economy was slowing down much faster than people had thought even a few months ago.
“That’s why it’s sensible for monetary policy to respond to changes – when the world changes we change our response,” he added.
The committee also warned the squeeze on household incomes and the Coalition’s austerity measures were likely to continue to restrict spending while ongoing strains on the banks would limit credit supply.
The deterioration in the economic outlook meant it was more likely that inflation – which hit 4.5% in August –would rise above 5% in the short term but then in the medium term dip below the 2% target.
At Westminster, Ed Balls, the shadow Chancellor, said the Bank’s move was its “contribution to Plan B” but would do little to create jobs or boost growth.
“What we really need,” he argued, “is a change in fiscal policy from the Government –getting the deficit down in a steadier and more balanced way with a credible plan to get the economy moving again, like the five-point plan for jobs Labour set out last week.”
The shadow Chancellor added: “Two years ago, George Osborne described quantitative easing as ‘the last resort of desperate governments’. Today, he is desperately hoping it will bail out his failing economic policy.”
SNP Treasury spokesman Stewart Hosie called for the £75bn to be injected into the economy quickly.
“Without real support for real business we will see a greater risk of the double-dip recession,” he warned.
In the City of London, business leaders welcomed QE2 after figures revealed household spending was at its lowest for almost a decade and the economy’s insipid growth was downgraded even further.
The value of the pound sank against most major currencies following the announcement while the FTSE-100 index closed more than 3% higher at 5291, boosted in part by the Bank’s decision.
Elsewhere, the European Central Bank offered new emergency loans to banks to help steady a eurozone financial system shaken by the region’s deepening debt crisis.
In Washington, US President Barack Obama ratcheted up the pressure on EU leaders, saying he hoped by the time of the G20 summit in Cannes next month they would have a concrete plan to overcome the debt crisis by creating enough “firepower” to help weaker member states like Greece.
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