£25bn injection welcomed but City warns of continued risks

BANK of England policymakers were yesterday warned that the UK economy remained in the "high-dependency unit", as markets responded favourably to an injection of a further £25 billion to help to drag the country out of recession.

Shares cut their opening losses at news of the expansion in quantitative easing (QE) and the Bank's decision to hold interest rates at a record low of 0.5 per cent.

Further encouragement came from official figures showing that Britain's manufacturers had bounced back from a weak August to record the biggest monthly rise in output for more than seven years.

It follows Wednesday's news that the crucial services sector – accounting for almost three-quarters of the economy – grew last month at its fastest rate for more than two years.

Although some analysts had been forecasting, and business leaders pushing for, a £50bn extension to the QE programme, the Bank's monetary policy committee (MPC) yesterday elected to pump an extra £25bn into the economy.

The move brings planned spending to a total of £200bn.

Opinions were divided as to whether that would mark the end of the programme.

Stephen Boyle, head of group economics at Royal Bank of Scotland, said there was no "plan B" in dealing with the UK's economic woes.

"The extension of the Bank's asset-purchase scheme reminds us that the risks of doing too little considerably outweigh the risks of doing too much," Boyle said.

"The UK economy is still in the high-dependency unit, but without QE it might have been in intensive care, or worse."

Recent GDP data showed the UK did not exit recession in the third quarter, confounding most economists' forecasts for a rebound. However, the rate of contraction eased, and together with this week's upbeat soundings on manufacturing and services, expectations will be heightened that the economy can stage a recovery in the final three months of the year.

Howard Archer, the chief UK economist at IHS Global Insight, said he suspected yesterday's increase in QE would be the last – "unless the economy suffers a major relapse".

"The fact that the MPC decided to limit the increase in quantitative easing to £25bn and to enact it at a slower rate over the next three months suggests that they believe the economy is on a modest recovery track," Archer added.

The London market closed 0.3 per cent higher at 5,125.6, reversing earlier losses, on relief that interest rates would be pegged below 1 per cent for the foreseeable future. As expected, the European Central Bank yesterday left rates in the eurozone unchanged at 1 per cent.

The two central banks' decisions came a day after the US Federal Reserve said it would keep borrowing costs near zero for an extended period.

Bernard McAlinden, a strategist at NCB Stockbrokers, said: "When you see the Bank of England continuing to ease, it confirms the view the central banks are more exercised by deflation risks than inflation and they are a long way from hiking rates."

John Hawksworth, the head of macroeconomics at PricewaterhouseCoopers, warned of the negative impact on economic recovery from rising unemployment over the winter months.

He said: "We think the MPC could have been even bolder by choosing to increase its asset purchases by £50bn, because GDP was nearly 6 per cent below its pre-recession peak in Q3 2009 and our projections suggest that it will not return to this peak until mid 2012, even assuming that a gradual recovery begins in Q4 (of this year]."

David Kern, chief economist at the British Chambers of Commerce, welcomed the decision to raise QE to £200bn, but expressed disappointment that the MPC had "not taken more specific measures aimed at stimulating bank lending to companies".

MANUFACTURING REBOUNDS

MANUFACTURERS across the UK bounced back from the weak August figures to record the biggest monthly rise in output for more than seven years during September, official figures yesterday revealed.

September's 1.7 per cent gain countered a 2 per cent fall in August as factories wound down production for the summer break, the Office for National Statistics (ONS) said.

The better-than-expected figure represented the biggest month-on-month rise since July 2002 as the sector edged towards recovery.

Industry surveys from the CBI and the Chartered Institute of Purchasing and Supply suggest stronger conditions in October – with manufacturers pulling out of recession for the first time since the beginning of 2008 in the final quarter of 2009.

IHS Global Insight economist Howard Archer said: "The manufacturing sector has clearly improved significantly overall… but sustainable healthy growth is still far from assured."