JANE WARDELL AP Business Writer

7:53 AM CDT, August 6, 2009
LONDON (AP) — The Bank of England surprised markets Thursday by significantly expanding its program of buying financial assets to boost the money supply, a growth-boosting step that indicates the British central bank remains cautious about recent signs of economic recovery.

The bank, while holding interest rates steady at a record low of 0.5 percent, said Thursday it was expanding its so-called quantitative easing program by 50 billion pounds ($84 billion) to 175 billion pounds ($295 billion).

RBS economist Stephen Boyle said the bank's nine-member monetary policy committee had "decided it is better to be safe than sorry."

"This tells us that the committee believes the UK economy remains in intensive care and that a bigger defribrillator is needed to help it emerge from the worst downturn for a generation," Boyle added.

The London Stock Exchange shrugged off the decision, which surprised many economists by the large increase, to continue its recent run higher, but the British pound quickly lost almost two cents against the U.S. dollar.

A statement from the monetary policy committee noted the recent conflicting data on the economy, saying financial conditions are "fragile" and that growth in the money supply "remains weak."

"On the one hand, there is a considerable stimulus still working through from the easing in monetary and fiscal policy and the past depreciation of sterling," the statement said.

"On the other hand, the need for banks to continue repairing their balance sheets is likely to restrict the availability of credit, and past falls in asset prices and high levels of debt may weigh on spending."

Britain's banks are still suffering from their losses in the financial crisis and government officials say they are too tight with credit for businesses despite getting government bailouts.

The committee added that while the British recession appeared to have been deeper than previously thought, the pace of contraction has moderated and "business surveys suggest that the trough in output is close at hand."

As policymakers began their monthly two-day meeting on Wednesday, they were confronted with data showing a rise in house prices in July and better-than-expected news on the manufacturing and services sectors.

But they were also taking note of the fact that the British economy contracted by twice as much as economists had forecast in the second quarter — gross domestic product shrank by 0.8 pecent between April and June.

While the contraction was smaller than the 2.4 percent in the first quarter, it was more than double the 0.3 percent average expected by economists.

The conflicting data had left economists divided ahead of Thursday's announcement about whether the bank would expand the quantitative easing program, in which it buys financial assets such as bonds from banks and pays for them by crediting the banks' account at the Bank of England, in effect creating new money.

Halting the asset buying program too early could prolong Britain's worst recession in decades, but pumping too much money into the economy raises the risk of an inflation headache down the road.

The Bank of England is charged with keeping inflation at 2 percent. More details on its inflation forecasts will be revealed at its quarterly survey next week

"I suspect it was the weaker money supply data, released earlier this week, which tipped the balance in the decision," said RLAM economist Ian Kernohan, who expects interest rates to remain at 0.5 percent well into 2010.

Lifting the quantitative easing program to 175 billion pounds required gaining approval from the Treasury Office, which had previously only given the bank a mandate to spend 150 billion pounds.

The bank said it expects to take another three months to complete the program, which had been due to end this month.