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Pedestrians walk past the Bank of England in London February 5, 2009. REUTERS/Stephen Hird
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The Bank of England looks set to cut interest rates by half a percentage point to a record low of 0.5 percent next week and start buying assets with newly created money to boost the economy. Fifty-four out of 62 economists polled by Reuters this week predicted a 50 basis point reduction when the Monetary Policy Committee concludes its 2-day meeting at midday on March 5. Below are a range of points likely to feature in the Monetary Policy Committee's discussions.
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QUANTITATIVE EASING
All nine MPC members voted in favour of embarking on a policy of quantitative easing at February's policy meeting and Governor Mervyn King has already asked Chancellor Alistair Darling for permission to do so.
Policymakers say there is not enough money flowing through the economy and this is why lending to households and businesses has remained tight, even as interest rates have come down sharply. They hope that boosting the money supply will solve that problem.
An exchange of letters between King and Darling is expected to be published before the MPC meets next week, in which Darling will set a limit on how much money the Bank may create to buy up government bonds (gilts) or commercial assets.
Only then will policymakers be able to decide when to launch a program of asset purchases.
The central bank may start off by buying government bonds, but could eventually extend its purchases to include commercial assets, like corporate bonds.
It already buys commercial paper under its Asset Purchase Facility, but this is financed by issuing Treasury bills and therefore does not increase the supply of money.
Analysts have been trying to figure out how much the central bank will be allowed to spend, with estimates in a Reuters poll ranging from 60 billion to over 140 billion pounds.
INFLATION
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