Bank of England seen preparing to print money

Bank of England Says Interest Rate Cuts Won't Be Enough

By Angela Monaghan
The Telegraph, London
Thursday, January 8, 2009

http://www.telegraph.co.uk/finance/financetopics/recession/4176004/Bank-...

The Bank of England admitted today that big interest rate cuts alone would not be enough to cure the UK's sick economy, as it slashed interest rates to the lowest in more than 300 years.

In a statement released after the Bank's Monetary Policy Committee cut rates by 0.5 perentage points to 1.5 percent, it said that "further measures" would be required to increase the flow of lending to businesses and consumers, the lack of which has been a major contributor to the downturn.

The MPC is expected to take further action over the coming months in an attempt to maximise the impact of low interest rates during recession.

However, if the bank rate falls to a level where further reductions are unlikely to have much bearing, the Bank is likely to turn to the less conventional policy of printing money, known as quantitative easing.

An increase in money supply would allow the Bank to buy assets including consumer loans from the banks, the theory being that if the banks have more money available they may be more willing to start lending again.

Additional money could also be used to buy government bonds to finance government borrowing, allowing it to inject more money into the economy.

"As the Bank Rate gets ever closer to zero, the key issue remains the “next stage” of monetary policy in the form of quantitative easing," said Matthew Sharratt, economist at Bank of America.

Shifting the emphasis from interest rate cuts to quantitative easing would put the handling of the recession more explicity in the hands of the Treasury, which would ultimately have to approve such measures.

The Bank's Governor Mervyn King has also said in the past that the Treasury may have to extend its bank recapitalisation programme.

Today's interest rate decision was expected by the majority of economists, who predict another cut next month. Mr Sharratt said that the MPC's more modest reduction compared with the last two decisions was driven by fears that a bigger cut would hit an already weak pound further.

Instead the pound continued to strengthen against the euro as it has done all week after falling to an all-time low of E1.02 on December 30, close to parity. One pound was trading at E1.12 at 2pm today.

Explaining its decision the MPC said that the pace of contraction in business activity increased during the fourth quarter and was "likely to continue to fall sharply during the first part of this year."

Earlier this week Nationwide said that house prices fell 15.9 percent in 2008, and gloomy surveys from the manufacturing and services industries have heightened the belief that the UK is economy will shrink sharply in 2009, and will not begin to recover in the second half of the year as predicted by the Chancellor in November.

The business community broadly welcomed the interest rate move but some said the MPC could have done more. Steve Radley, chief economist at the manufacturers organisation EEF accused the MPC of being "too timid."

He added: "Given the expectation that rates will be cut again the question has to be asked 'why wait?'"

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