(Repeats story transmitted on Friday)
By David Milliken
LONDON, Aug 7 (Reuters) - The Bank of England's unexpected decision to pump an extra 50 billion pounds into Britain's economy has left many economists puzzled and a minority concerned it lays the groundwork for financial instability.
Few if any economists had forecast that the central bank would raise to 175 billion pounds ($293 billion) the total of newly created money it will spend buying up financial assets, especially given a spate of upbeat data in the days before the move.
"This is a 'shoot first and ask questions later' type of policy," said Nick Kounis, UK economist at Fortis Bank.
"I can't for the life of me see why, with the economy picking up, they haven't gone for a 'wait and see' approach to see how the data is coming in."
Kounis likened the BoE's decision to that of the U.S. Federal Reserve to slash interest rates earlier in the decade, when there were similar deflation worries after the dotcom crash -- a move many economists blame for creating the asset price bubble that led to the current crisis.
In some ways the problem was worse, because a policy based on asset purchases totalling a third of gilts in circulation, and worth 12 percent of Britain's annual economic output, could not be reversed as quickly as raising too-low interest rates without causing market turmoil, Kounis said.
"I thought that one of the lessons that had been learnt from this crisis was that a very narrow focus on meeting inflation targets over a fixed period is not the way to go, as it contains risks for financial stability," he said.
LESS SLACK?
While few other economists view the dangers quite as starkly, some do agree that the BoE has overestimated the amount of slack in Britain's economy as a result of the recession.
The rate at which Britain's economy can grow without generating inflation above the BoE's 2 percent target has probably fallen from 2.5-3.0 percent pre-crisis to around 2 percent after, said Simon Hayes, economist at Barclays Capital.
Hayes based his estimates on growth after past financial crises such as the Great Depression in the 1930s and Sweden's bank collapses in the 1990s, and said it was impossible to tell whether the BoE's models had kept up with greater inefficiencies in capital markets.
"The evidence from past banking crises is that you take quite a big hit to productivity. Basically there is a lot more friction in the wheels of the economy," he said.
The silver lining is that this makes an asset price bubble unlikely, even if monetary policy is looser than ideal.
"It's difficult to see you'd seriously risk sparking an asset price bubble in these circumstances," Hayes said.
Thursday's decision also marked a further break with central bank efforts to make policy transparent to markets and a step back to an earlier age of central bank secrecy, said Robert Barrie, economist at Credit Suisse.
"It's not the case, as Mervyn King has said it should be, that the economy surprises, but policy doesn't. It's really very difficult to go from ... improving business surveys in the UK and elsewhere, normalising financial markets, and rising house and equity prices to the latest decision," he said.
As a result, financial markets should be ready for a rapid and unexpected reversal in policy in future.
"We can all agree that it's easier to raise rates than cut them when they are at, or close to, zero. We should all agree as well, however, that that's what this approach is likely to imply," he said.
Nonetheless, expectations of flawless policy from a central bank were unrealistic, said Philip Shaw, economist at Investec.
"If at the end of the cycle the conclusion is that the Bank has provided 50 billion too much of QE, that's a satisfactory outcome compared to what might have happened. No central bank can get policy spot on," he said.
"If it suddenly finds it's done too much, it can reverse it quickly," he added. (Reporting by David Milliken; Editing by Andy Bruce)