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August 7, 2009

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BOE decision shocks market

THE Bank of England took a far bigger step than expected to boost Britain's recession-hit economy yesterday, stunning markets by expanding its quantitative easing plan to 175 billion pounds (US$294 billion) from 125 billion pounds.

The central bank said Britain's downturn appeared to have been deeper than previously thought and, while the trough in output was near and some recovery was on the way, tight credit conditions would remain a considerable drag.

The decision shocked many investors who had been starting to take a brighter view of the British economy, especially after recent economic data suggested the year-long, steep recession may have ended in the third quarter.

Economists had been evenly split on whether the BOE would increase its quantitative easing scheme, completed last week, or pause to gauge what impact it was having.

Few if any had forecast an expansion above the original government-set limit of 150 billion pounds.

"This is a huge surprise," said Ross Walker, UK economist at Royal Bank of Scotland. "All the rhetoric seemed to point to not doing very much more, even up to 150 (billion) seemed odds-against after the better (economic) surveys."

The pound fell more than a cent against the United States dollar and gilt futures rocketed higher after the BOE's decision, which also saw interest rates at a record low of 0.5 percent.

Markets will now await the central bank's quarterly inflation forecasts - due next Wednesday - for a further explanation of the decision.

"I would not say this is the end of it - if they decide in three months the economy still needs more stimulus they might actually do more," said Jonathan Loynes, chief UK economist at Capital Economics.


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