LONDON (Reuters) - The Bank of England set the money press rolling again on Thursday, saying it will pump another 50 billion pounds into the economy to bolster a fragile recovery and shield Britain from fallout from the unresolved euro zone debt crisis.
The bank's decision to print more money to buy government bonds comes despite signs Britain may avoid slipping back into recession and fresh hopes that a deal for debt-ridden Greece will forestall euro zone turmoil.
"Some recent business surveys have painted a more positive picture and asset prices have risen," Bank of England Governor Mervyn King said in a letter to finance minister George Osborne, explaining the decision.
"But the pace of expansion in the United Kingdom's main export markets has also slowed and concerns remain about the indebtedness and competitiveness of some euro-area countries," he added.
The cash boost was welcomed by the government, which has come under pressure again to loosen its austerity drive after the economy shrank at the end of 2011 and unemployment hit its highest level in more than 17 years.
Osborne said the central bank's loose monetary policy continued to play a "critical" role in supporting the economy as he continued his austerity programme, and remained the main tool to respond to changes in the outlook.
Other global central banks are taking action to boost their economies, too. The European Central Bank kept rates at a record low 1 percent on Thursday, and the U.S. Federal Reserve is close to deciding whether to launch a third round of its own quantitative easing programme.
A Reuters poll after the BoE decision showed economists expect the bank to make one last foray into bond markets to buy gilts before it finally shuts down the printing presses.
Britain's recovery from a deep slump during the 2008-2009 financial crisis has been weak so far, and the contraction of the economy in the final quarter of 2011 stoked fears of a renewed recession.
The central bank said inflation would have probably fallen below the target of 2 percent over the medium term without further easing, as a significant amount of unused capacity in the economy and unemployment was bearing down on prices.
Inflation fell from the three-year peak of 5.2 percent in September to 4.2 percent in December, and policymakers have voiced confidence that it will dip below the BoE's 2 percent target later this year, as predicted in November.
The BoE said improving real incomes were set to support a gradual recovery this year, though tight credit conditions and the government's austerity measures presented headwinds.
In addition to extending the asset purchases to a total of 325 billion, the central bank held its key interest rate at a record low 0.5 percent.
Sterling rose to a session high against the U.S. dollar while gilts reversed gains after the BoE decision. Gilts dropped further after Greek politicians agreed on debt-cutting steps to secure aid and help the country avert an unruly debt default.
The British Chambers of Commerce said that more QE was welcome but that the bank should consider buying other assets than gilts. BCC chief economist David Kern also called for an aggressive deregulatory programme alongside a package of credit-easing measures or an SME bank to boost the economy.
A surprise jump in industrial production in December and an unexpected narrowing in Britain's trade deficit announced earlier on Thursday added to recent signs that the economy has picked up since the turn of the year.
But Britain's leading macroeconomic think tank, NIESR, reiterated its recent forecast of an overall economic stagnation in 2012, saying output contracted 0.2 percent in the three months to January.
"Unless output turns down again, the recession is over, while the period of depression is likely to continue for some time," NIESR economists said.
Britons have experienced the worst squeeze on living standards in a generation during the past two years, because prices have risen much faster than wages.
Europe's biggest provider of own-brand household and personal care goods, McBride, said on Thursday that supermarkets are pinning hopes increasingly on these products to lure cash-strapped shoppers.
BoE governor King has warned that the country faced a long and arduous recovery as the country struggles to deal with the huge amount of debt households piled up before the crisis and the government had to take on to bail out several banks.
The BoE surprised markets in October by restarting its gilt purchases, going on to buy 75 billion pounds of gilts, largely to shield Britain from the euro zone crisis.
A majority of analysts polled by Reuters had pencilled in a 50 billion pound injection over three months, and the latest poll showed they expect another dose of the same amount in May, taking the overall total for QE to 375 billion pounds.
But most were surprised by what the BoE described as an "operational" decision to focus its gilt purchases on slightly shorter maturities than before, to avoid market frictions.
Many economists expect further increases in quantitative easing in May, although they also noted that some policymakers may already have second thoughts about more easing.
"We still think that QE2 has much further to go," said Vicky Redwood from Capital Economics. "There is a chance that today's decision was not unanimous, with those members less convinced that inflation will fall sharply, for example Spencer Dale, perhaps voting to keep the asset purchase programme at 275 billion pounds."
The minutes from the two-day Monetary Policy Committee meeting will be released in two weeks, but economists will get an earlier steer when BoE Governor Mervyn King presents fresh quarterly inflation forecasts next week.