The world is possibly facing the worst economic crisis in history, the governor of the Bank of England said Thursday.
Sir Mervyn King was speaking after the decision by the Bank’s Monetary Policy Committee to put 75 billion pounds ($114.81 billion) of newly created money into the economy in a desperate effort to stave off a new credit crisis and a UK recession, the Daily Telegraph
“This is the most serious financial crisis we’ve seen, at least since the 1930s, if not ever. We’re having to deal with very unusual circumstances, but to act calmly to this and to do the right thing,” he said.
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“The world economy has slowed, America has slowed, China has slowed, and of course particularly the European economy has slowed,” King said.
|Sir Mervyn King
(Associated Press photo)
“The world has changed and so has the right policy response.”
That right policy response, in England's case, involves stimulus measures.
The bank will increase the size of its asset purchase program, financed by the issuance of central bank reserves, by 75 billion pounds, bringing the total to 275 billion pounds, the Bank of England says.
The Bank of England's move aims to stave off the negative effects from government budget cuts and Europe’s debt crisis, Bloomberg reports.
Some analysts applaud the bank's decision.
"The markets are quite volatile, and during such periods it’s right for the bank to take a firm lead to show they’re in charge of policy and will do what they think is right for the economy,” David Tinsley, an economist at BNP Paribas and a former Bank of England official, tells Bloomberg.
“You’d be unwise to assume things would settle down over the next few months.”
Debt concerns have roiled European and U.S. markets, fueling fears that the developed world is headed back into recession.
That's especially bad news for the U.K., which relies heavily on both Europe and the United States as export markets.
“The pace of global expansion has slackened, especially in the U.K’s main export markets,” the central bank said, Bloomberg adds.
“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. These tensions in the world economy threaten the U.K. recovery.”
Quantitative easing aims to fuel growth and hiring and steer an economy away from deflation but on the flip side, experts say, stokes inflationary pressures that may actually hinder growth down the road.
When interest rate cuts and other traditional expansive monetary policies don't work, quantitative easing follows and signifies the economy is not in good shape.
Many economists say they weren't surprised to learn the bank's Monetary Policy Committee (MPC) would inject fresh money into the system but say they were expecting 50 billion pounds and the announcement of such to come in November.
The October announcement of 75 billion pounds suggests the economy looks bleak.
"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," says Peter Dixon, economist at Commerzbank, the Associated Press reports.
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