The Bank of England expanded its bond-purchase plan for the first time in almost two years, lifting it to 75 billion pounds ($114.81 billion)  as government budget cuts and Europe’s debt crisis jeopardize Britain’s economic recovery.

The nine-member Monetary Policy Committee led by Mervyn King raised the ceiling for so-called quantitative easing to 275 billion pounds from 200 billion pounds. Twenty one of 32 economists in a Bloomberg News survey forecast no change, and the rest predicted increases ranging from 50 billion pounds to 100 billion pounds. The bank expects to complete the new round of purchases in four months.

The yield on the U.K.’s 10-year government bond dropped after the announcement, falling to as low as 2.228 percent from 2.352 percent before the statement. The central bank said slowing global growth and the turmoil in Europe “threaten the U.K. recovery.” It also said it is now “more likely” that inflation will undershoot its 2 percent goal in the medium term.

The MSCI All-Country World Index slid into a bear market last month as European officials tried to contain a crisis that the International Monetary Fund said presents “acute” risks to the global economy. The MPC’s move marks a victory for policy maker Adam Posen a year after he started voting for more bond purchases and comes a day after data showed the U.K. economy barely grew in the second quarter.

“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,” said David Tinsley, an economist at BNP Paribas SA and a former Bank of England official. “You’d be unwise to assume things would settle down over the next few months.”

‘Tensions’

The bank held its benchmark interest rate at a record low of 0.5 percent, as forecast by all 53 economists in a separate survey.

“The pace of global expansion has slackened, especially in the U.K’s main export markets,” the central bank said. “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.”

The central bank last announced an increase in its bond program in November 2009 and the purchases ended in early 2010. Chancellor of the Exchequer George Osborne has said he will approve any request for more stimulus and today’s expansion shows policy makers are prioritizing the recovery over the threat from inflation. Annual consumer-price growth was 4.5 percent in August, more than double the central bank’s target.

ECB

The European Central Bank is forecast to keep its benchmark rate unchanged at 1.5 percent in Berlin today. The decision will be announced at 1.45 p.m. local time. It will be the last policy meeting chaired by Jean-Claude Trichet before he is succeeded by Mario Draghi.

The U.S. Federal Reserve responded to the economic slowdown last month by adopting so-called Operation Twist, replacing $400 billion of Treasuries in its portfolio with longer-term securities in a move aimed at further reducing borrowing costs and lowering unemployment.

Policy makers Ben Broadbent and David Miles indicated last month they were moving closer to joining Posen’s call to resume asset purchases. Minutes of today’s decision, revealing how officials voted, will be published on Oct. 19 in London.

Services

Two reports this week indicated the U.K. recovery retains some momentum, with gauges of services and manufacturing unexpectedly strengthening in September. Still, gross-domestic- product data showed the economy grew just 0.1 percent in the second quarter, less than previously estimated, as consumer spending plunged the most in more than two years. The pound has dropped about 3 percent against the dollar in the last month.

Britain has struggled to recover from the recession, with the economy barely growing over the past year. The IMF cut its 2011 and 2012 U.K. growth forecasts last month to 1.1 percent and 1.6 percent from 1.5 percent and 2.3 percent, respectively.

The economic outlook means the bank will be “more prone to action,” John Gieve, a former member of the MPC, told Bloomberg Television yesterday.

International Pressure

As the global recovery cools and Europe’s debt crisis threatens to spread to Italy and Spain, equity markets have suffered. The Stoxx Europe 600 Index fell 17 percent in the third quarter, while London’s FTSE 100 Index dropped 14 percent, the biggest quarterly drop since 2002.

U.K. Prime Minister David Cameron said on Oct. 4 that European leaders must resolve the crisis without delay, while U.S. Treasury Secretary Timothy F. Geithner warned last month that failure to combat the turmoil could lead to “cascading default, bank runs and catastrophic risk.”

“We are facing a real potential crisis in Europe,” Gieve said. “There is evidence credit conditions are tightening.”

European Union officials are working on plans to boost bank capital to contain the euro-region crisis, the IMF said yesterday. Leaders of the Group of 20 nations will meet in Cannes, France, on Nov. 3-4, which international finance chiefs see as the deadline for resolving the turmoil. The Bank of England publishes new quarterly economic forecasts Nov. 16.

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