With the Bank rate cut to just 0.5% in March, and likely to be left there until well into next year, the only point up for meaningful discussion has been whether to tinker with the Asset Purchase Facility through which quantitative easing (QE) is being conducted.

Having agreed in May to boost the QE programme spend to £125bn, at last month's meeting they opted to put off any further decisions until August when a new set of economic forecasts would be available.

And this month's announcement has been well worth the wait as it is far from dull. The chief surprise was the extension of the the asset purchase programme by a further £50bn to £175bn. With mounting evidence that the global economy is emerging from recession, most pundits had expected the Bank of England to either call a halt to the QE programme or extend it only by the £25bn originally approved.

This month's MPC decision was a bold one. Above all, it suggests that the Committee was unconvinced that the recovery will be sufficiently robust to push inflation back to the 2% target in two years.

A return to growth
The latest crop of PMI (Purchasing Managers' Index) surveys covering July indicated further improvement in the business climate in the world's major economies. They point to expansion in China's manufacturing industries and in Britain's services sector, and a return to growth in British manufacturing - the first since May 2008.

These results - together with hard data on economic growth, manufacturing production and exports from the likes of the US, China, Japan and Korea - point to a return to growth for the global economy in the third quarter of 2009. In the UK, industrial output rose by 0.5% in June, with manufacturing production up by 0.4%. The only bad piece of news of recent weeks was the larger than expected decline of 0.8% in the UK's GDP in the second quarter.

The other factor that clearly weighed on the minds of MPC members was the state of credit markets. A key concern for the months ahead is whether a nascent recovery will be choked by a shortage of bank lending. It is encouraging that several of the British banks are now profitable again, albeit that this was largely down to their investment banking operations.
The much-trumpeted increase in lending to small businesses in June does not detract from the fact that between March and June net lending to businesses by banks and building societies fell at an annualised rate of 5%, a steeper fall than in the final three months of last year.

The weakness of lending might be explained as much by a lack of demand as by a lack of appetite and capacity on the part of banks. But it still seems odd that the flow of lending to businesses was weaker in the second quarter than it was in the first quarter. The acid test will come during the next few months when a return to economic growth is bound to increase the demand for finance.

The extension of QE should therefore be seen as a further signal of the MPC's commitment to do whatever is necessary to restore the flow of credit. Past statements have made it clear that the MPC believes the risks of doing too much are less than the risks of doing too little.

However, it is also significant that the committee only sought an extension of £25bn over and above the existing mandate for £150bn. This suggests that it believes that one final dose of QE medicine was worth administering as insurance against the recovery being starved of credit. The likelihood is that when they next discuss the QE programme in earnest, which will be at November's meeting, they will decide to call a halt.

Mark Berrisford-Smith is senior economist at HSBC