THE Bank of England yesterday hiked the scale of its quantitative-easing programme by a further £50 billion to £325bn, highlighting a need for this further monetary stimulus because of the "weak" near-term outlook for the UK economy.
However, pension consultant Hymans Robertson warned the move was "bad news" for people looking to buy an annuity as they approached retirement. It highlighted the potential for the latest increase in QE to further depress bond yields, which are used to price annuities.
In a letter to Chancellor George Osborne, Bank of England Governor Sir Mervyn King highlighted the economic "headwind" arising from the UK Government's fiscal consolidation and tight credit conditions.
He added: "The correspondingly weak outlook for near-term output growth means that a significant margin of economic slack is likely to persist."
The Bank's Monetary Policy Committee (MPC) also voted to hold UK base rates at a record low of 0.5%, where they have been since March 2009, when it concluded its latest two-day monthly meeting at noon.
The MPC forecast a further sharp fall in annual UK consumer prices index inflation from the 4.2% rate to which it had fallen by December.
It said: "In the light of its most recent economic projections, the committee judged that the weak near-term growth outlook and associated downward pressure from economic slack meant that, without further monetary stimulus, it was more likely than not inflation would undershoot the 2% target in the medium term."
The QE programme, through which the Bank creates new money to buy Government and corporate bonds, is aimed at boosting the amount of money circulating and stimulating economic activity.
Liz Cameron, chief executive of Scottish Chambers of Commerce, said of the increase in QE: "With continuing uncertainty in the near term, this has to be the right decision."
But she declared: "At a more practical level for Scottish businesses, a key issue remains the easing of credit flow and the need for banks to meet their lending targets for small and medium-sized businesses."
She added that Scottish Chambers was looking for "further progress in this regard".
Patrick Bloomfield, partner of Hymans Robertson, said of the impact of the increase in QE on annuities: "Quantitative easing may sound like a matter only for economists, but the effects of it could impact on anyone approaching retirement."
He added: "Insurance companies use the yields on bonds to set the price of annuities, but QE may see a drop in those yields, meaning annuities become more expensive, and offer less money per year to retirees."
Fellow Hymans Robertson partner Clive Fortes meanwhile highlighted increased difficulties for companies in addressing pension scheme deficits as a result of the latest rise in QE.
He said: "While QE might have beneficial impacts in terms of reducing the cost of Government borrowing and boosting money supply in the economy, the flip side is that the yields available from UK gilts have plummeted to levels not seen since the late 1800s. For pension schemes in search of stable yields, that is not good news."
Although noting that Hymans Robertson expected the latest increase in QE would have "considerably less impact" in this regard than previous rounds, he added: "What we do expect is [it] will extend the period before we might see gilt yields rising to even the levels seen 12 months ago. We therefore think that companies will face a long slow process of restoring the funding position of their pension schemes."
Ros Altmann, director-general of the Saga Group and an expert on pensions policy, said yesterday that she was very concerned about the latest round of QE.
She added: "This is, in my view, dangerous for all asset markets and all investors, as well as causing further damage to pensions, pension funds and annuities."
Ms Altmann said: "The balance of risks is that QE will not help growth, but will cause economic damage."
Data from the Office for National Statistics yesterday showed that UK manufacturing output rose by 1% month-on-month on a seasonally adjusted basis in December. This was the biggest monthly rise in manufacturing output since May 2011, and followed a 0.2% fall in November.
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