UK-Worst economic crisis in history

The Bank of England surprised markets Thursday by sanctioning another 75 billion pound ($116 billion) injection into the British economy, which is suffering from the shock waves of Europe's debt crisis and an austerity program.

The bank's chief, Mervyn King, told Sky News on Thursday that the crisis was the most serious since the 1930s, "if not ever." In a separate interview, he told the BBC that the world economy as a whole is slowing down "much faster than people thought only a few months ago."

The bank's rate-setting Monetary Policy Committee said it was reviving a program of asset purchases, which injected 200 billion pounds in between March 2009 and January 2010 to help lift Britain out of a deep recession. The hope is that by buying government bonds from banks, they will use their cash injection to lend to hard-pressed businesses and households.

The scale of the asset purchases, which will take four months to complete, was more than anticipated by those predicting Thursday's move. Most economists thought the bank would opt to wait until November before deciding on a more moderate 50 billion pound injection.

"It is clearly an indication of the extent to which the MPC is worried about the slowdown that it has chosen to act so soon and so decisively," said Peter Dixon, economist at Commerzbank.

In a statement, the nine members of the MPC said the pace of global expansion has slackened, especially in Britain's main export markets — a reference to the eurozone, which is mired in a debt crisis that's beginning to impact on banks' day-to-day activities.

"Vulnerabilities associated with the indebtedness of some euro-area sovereigns and banks have resulted in severe strains in bank funding markets and financial markets more generally," the panel said. "These tensions in the world economy threaten the U.K. recovery."

Though the eurozone economy is also showing increasing signs of heading back into recession, the European Central Bank opted to keep its main interest rate unchanged at 1.5 per cent. Many in the markets had been predicting a cut.

While launching another round of quantitative easing, the Bank of England's panel left the base lending rate at an all-time low of 0.5 per cent and said that inflation would likely undershoot the 2 per cent target in the medium term in light of the deteriorating outlook. It's currently running at 4.5 per cent and likely to go above 5 per cent in the next month or two on the back of higher utility bills, the panel said.

"In the light of that shift in the balance of risks, and 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 panel said.

The pound slumped soon after the announcement, trading 1.1 per cent lower at $1.5293 as investors were caught unawares by the surprisingly big increase.


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