LONDON (Reuters) - The Bank of England has sought government permission to create new money to help pull the economy out of recession, and could start buying government bonds or other securities with the cash within days.
Minutes of the Bank’s policy meeting on February 4-5, released on Wednesday, showed that all nine members of the Monetary Policy Committee thought more monetary stimulus was needed. They voted to ask the Treasury for the powers to engage in what is known as quantitative easing -- boosting the money supply.
This was tried in Japan in the early part of this decade with limited success. But with interest rates around the world close to zero and economies in recession or near it, many central banks are wondering what else they can do.
The Bank said it could buy gilts -- government bonds -- which should boost private sector demand, and also corporate bonds and commercial paper which should help the economy by easing credit conditions.
Sterling fell and gilts rose after publication of the minutes, which also showed the MPC voted 8-1 for cutting interest rates by 50 basis points to a record low of 1.0 percent. Arch-dove David Blanchflower wanting a 100 bps cut.
“The minutes make it crystal clear that quantitative easing is imminent,” said Simon Hayes, economist at Barclays Capital.
The Treasury will now have to respond to the MPC’s request and an exchange of letters is likely to be published soon, but the approval is likely to be a formality.
It will be up to the government, however, just how much new money is created, although the MPC could always ask for the limit to be raised if it found it needed to buy more assets to meet its inflation target.
Most analysts polled by Reuters after the minutes were published said the central bank would cut rates again next month, probably to a level of 0.5 percent.
But some MPC members were worried even earlier this month that further rate cuts could actually hurt the economy, as low rates reduce bank profitability and stopped them from lending.
“There was a great deal of uncertainty about what would happen to banks’ and building societies’ ability and willingness to lend at low levels of interest rates,” the minutes said. “It was possible that the negative impact on profitability could be significant for some banks as Bank Rate fell further.”
Some members of the MPC also noted that past rate cuts and fiscal policy, plus falls in commodity prices and sterling, had given a lot of stimulus.
But so far there is little sign the pound’s weaker exchange rate is helping. A survey by the Confederation of British Industry on Wednesday showed manufacturers’ order books balance falling at their sharpest rate since 1992 and firms expect to cut output at its fastest pace in nearly 30 years.
The export orders balance slumped to its lowest since November 2001. “This is further confirmation -- as if it was needed -- of continued sharp contraction in industrial activity during Q1,” said Alan Clarke, UK economist at BNP Paribas.
Additional reporting by Fiona Shaikh, David Milliken and Jonathan Cable
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