Bank of England Vows to Buy Assets to Bolster Lending

10th April-2009


The British central bank said on Thursday that it would fully carry out a £75 billion asset-purchase program during the next two months, seeking to reassure investors that it was committed to steps to revive bank lending.

The Bank of England made the announcement after its Monetary Policy Committee left its main interest rate at 0.5 percent, the level it set in March and the lowest in its three-century history. The bank had been cutting rates since last October, when the rate stood at 5 percent.

Like the Federal Reserve in the United States and the Bank of Japan, which also have set official interest rates at rock-bottom levels, the British monetary authorities have begun unconventional operations, including so-called quantitative easing, to increase lending.

The Monetary Policy Committee voted last month to use the bank’s balance sheet to buy £75 billion, or about $110 billion, of government and company bonds — effectively creating new money.

But investors had been demanding more clarity about the bond purchase plans, after the Bank of England’s governor, Mervyn King, appeared to suggest last month in an address to Parliament that the program might be retired early.

In a terse statement Thursday, the bank said: “The committee noted that since its previous meeting a total of just over £26 billion of asset purchases had been made and that it would take a further two months to complete that program.”

The economic news from Britain remains grim. The central bank’s survey of credit conditions showed last week that financial institutions remained wary of extending credit amid rising mortgage defaults and fear over the economic outlook.

On Tuesday, the Office for National Statistics reported that manufacturing output slumped by 6.5 percent in the December-February period compared with the previous three months. A report Thursday showed March producer prices in check, rising just 2 percent from a year earlier.

“The data of the last week or two suggest we might be past the worst,” Vicky Redwood, an economist at Capital Economics in London, said. “But they also suggest that the U.K. economy is a long way from actual growth.”

Ms. Redwood forecasts the economy will shrink 4 percent this year, and by a further 1 percent in 2010.

As in Spain, the United States and Ireland, Britain’s economy grew rapidly during the years of easy credit, helped along by a frothy property market.

The credit crisis last year and tumbling housing prices have sent the economy into a tailspin, cost millions of Britons their jobs and undermined government finances.

Last week, the European Central Bank lowered its benchmark rate to 1.25 percent, from 1.5 percent, less than was expected.