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Heather Stewart, Patrick Wintour23 Sep 2011 00:00
The United States central bank has unleashed a radical $400-billion plan to prevent the world’s largest economy sliding back into recession, as it emerged that the Bank of England itself was gearing up to pump billions into the British economy.
With the eurozone debt crisis rattling financial markets and unemployment continuing to rise, policymakers on both sides of the Atlantic are battling to prevent the current “soft patch” in the global economy turning into a full-blown slump.
Share prices fell sharply after the US Federal Reserve’s announcement on Wednesday evening, with the Dow Jones industrial average on Wall Street losing more than 150 points.
On the day that the Britian’s Deputy Prime Minister, Nick Clegg, told the Liberal Democrat annual conference that the economy was “our biggest concern”, minutes from the Bank of England’s latest meeting revealed that its nine-member monetary policy committee (MPC) was close to implementing a new round of the £200-billion quantitative easing (QE) that the bank carried out at the height of the financial crisis in 2009.
“For most members, the decision of whether to embark on further monetary easing at this meeting was finely balanced since the weakness and stresses of the past month had significantly strengthened the case for an immediate resumption of asset purchases,” the minutes said.
Just one MPC member, the American economist Adam Posen, voted for an immediate extension of QE, but it was clear that others came close to joining him.
“For some members, a continuation of the conditions seen over the past month would probably be sufficient to justify an expansion of the asset purchase programme at a subsequent meeting.”
Samuel Tombs, British economist at Capital Economics, said the MPC minutes “strongly suggest that QEII is set to be launched in the very near future”.
Analysts at Goldman Sachs said a decision would probably come as soon as next month.
With interest rates already close to zero, central banks have few weapons left and have been forced to resort to unconventional measures.
The fact that the MPC came close to starting QEII just months after some were calling for a rise in interest rates to choke off inflation, underlines how rapidly the health of the economy has declined since the start of the year.
It has also increased pressure on Britain’s coalition government to come up with an alternative plan to its deficit-cutting strategy, but Clegg was forced to quash talk coming from his Cabinet colleagues of a multibillion capital spending boost to revive the flagging economy.
He told the party conference in Birmingham that deficit reduction was “the essential foundation for growth”.
In a sombre closing speech to conference, Clegg warned of “a long, hard road ahead”, and said the economy was the biggest concern due to the fragility of the recovery.
Meanwhile in the US, under “Operation Twist”, named after a similar measure launched in the 1960s under president John F Kennedy, the Fed said it would buy $400-billion of long-term treasury bonds by June 2012, funding the purchases by selling shorter-term debts.
The measure is aimed at driving down long-term interest rates across the economy, helping to cut the cost of borrowing for debt-burdened homeowners and struggling firms.
In another effort to help the ailing American housing market, the Fed chairman, Ben Bernanke, said that as the mortgage-backed securities it owns matured, it would reinvest the proceeds in buying new mortgage bonds.
Bernanke’s announcement came after the International Monetary Fund (IMF), which is holding its annual meetings in Washington, warned that the world financial system was “back in the danger zone”.
“Financial stability risks have increased substantially, reversing some of the progress that had been made over the previous three years. So we are back in the danger zone,” Jose Vinals, the IMF’s financial counsellor, told journalists in Washington, DC, as the IMF launched its Financial Stability Report.
Vinals cited three financial system shocks: unequivocal signs of a broader global economic slowdown, turbulence in the euro area and the US credit downgrade.
“This has thrown us into a crisis of confidence, which is being driven by three main factors: weak growth, weak balance sheets and weak politics.”
In its statement on Wednesday night, the Fed’s Open Markets Committee said the economic outlook had deteriorated sharply. “Recent indicators point to continuing weakness in overall labour market conditions, and the unemployment rate remains elevated.”
In the United Kingdom, the slowdown is taking its toll on chancellor of the exchequer George Osborne’s efforts to fix the public finances. Public borrowing hit a record high for August last month, according to the Office for National Statistics. On the treasury’s preferred measure, which excludes the cost of bank bailouts, borrowing rose to £15.9-billion last month, compared with £14-billion a year ago.
The British Office for National Statistics also reported that the government had borrowed less in previous months than originally thought, but analysts said the chancellor was still likely to miss his deficit target for this year.
“A significant pick-up in tax receipts over the coming months or an undershoot on investment spending could lead to the Office for Budget Responsibility’s [OBR’s] forecast still proving correct, but it is also possible that the deficit this year could even exceed the deficit last year,” said Rowena Crawford, research economist at the Institute for Fiscal Studies.
A treasury spokesperson insisted the chancellor’s plans were on track, although conceding that “these are challenging times”.
Borrowing in the financial year so far was revised down by £4.6-billion to £51.5-billion, mainly due to a recalculation of local government data and income tax receipts. Last year’s total was revised down to £136.7-billion.
Chris Williamson, chief economist at financial information services company Markit, said: “There seems little hope that the government will hit its spending targets this year, as slower growth means less tax revenues and higher welfare spending.”
The worse-than-expected budget figures came as some Lib Dem Cabinet members are claiming the party can boost capital spending without harming the government’s chief fiscal mandate of eradicating the current structural deficit by 2015.
The argument was backed in principle by Sir Alan Budd, first interim chairman of the OBR: “The main government target relates to the current balance of the budget. That does not include capital spending, so the government could, in principle, increase capital spending by adding to its plans or bringing forward its public spending without in that way harming its established fiscal target.”
The CBI, Britain’s primary voice of business, also called for a quick construction programme, including tolls to finance private sector road building.—
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