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Bank of England likely to follow suit with round of quantitative easing after eurozone debt crisis rattles financial markets The United States central bank has unleashed a radical $400bn plan to prevent the world’s largest economy sliding back into recession, as it emerged that the Bank of England was itself gearing up to pump billions into the British economy. 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 as the eurozone debt crisis rattles financial markets, and unemployment continues to rise. Share prices fell sharply after the Fed’s announcement, with the Dow Jones industrial average on Wall Street losing more than 150 points. On the day that the deputy prime minister, Nick Clegg, told the Liberal Democrat 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) came close to implementing what the City has dubbed “QEII” – a new round of the £200bn of so-called quantitative easing which 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 US 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, UK 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 the coalition 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 Liberal Democrats’ 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 our 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 Kennedy, the US Federal Reserve said it would buy $400bn (£258bn) 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 US housing market, the Fed chairman, Ben Bernanke, said that as the mortgage-backed securities it owns mature, it will reinvest the proceeds in buying new mortgage bonds. Bernanke’s announcement came after the International Monetary Fund, which is holding its annual meetings in Washington, warned that the world financial system is, “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,” José Viñals, the IMF’s financial counsellor, told journalists in Washington DC, as the IMF launched its Financial Stability Report. Viñals cited a trio of 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, the Fed’s Open Markets Committee said the economic outlook had deteriorated sharply. “Recent indicators point to continuing weakness in overall labor market conditions, and the unemployment rate remains elevated.” In the UK, the slowdown is taking its toll on 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 £15.9bn last month, compared with £14bn a year ago. The ONS also reported that the government had borrowed less in previous months than originally thought; but analysts said the chancellor still looked 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 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 spokesman insisted the chancellor’s plans were on track, while conceding that, “these are challenging times.” Borrowing in the financial year so far was revised down by £4.6bn to £51.5bn, mainly due to a recalculation of local government data and income tax receipts. Last year’s total figure was revised down to £136.7bn. Chris Williamson, chief economist at 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,” he said. 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 Office of Budget Responsibility: “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 also called for a quick construction programme, including tolls to finance private sector road building. Global recession Recession US economy Financial crisis Quantitative easing European debt crisis Economics Global economy Bank of England European banks Banking United States Heather Stewart Patrick Wintour guardian.co.uk