Bank of England Cuts Rates to 0.5%


The Bank of England reduced the benchmark interest rate to the lowest ever and said it would start purchasing 75 billion pounds ($105 billion) in assets, printing money to fight the recession.

The bank’s nine-member panel, led by Governor Mervyn King, cut the rate a half point to 0.5 percent, the lowest since the bank was founded in 1694. The decision matched the median forecast of 60 economists in a Bloomberg News survey.

King’s Monetary Policy Committee wants to pump newly printed money into the economy to alleviate a worsening recession as interest rates approach zero and lose their potency. Prime Minister Gordon Brown yesterday called on nations around the world to follow the U.S. and U.K. lead by cutting borrowing costs and spending more to battle the recession.

In a statement accompanying the decision, the bank said it may take up to three months to carry out the asset purchases. Most of the assets will be U.K. government bonds known as gilts. The bank will hold a open market operation tomorrow.

The Bank of England has now reduced the key rate 4.5 percentage points since October. The U.S. Federal Reserve kept its benchmark at a range of zero to 0.25 percent last month. The European Central Bank will probably cut its rate a half- point to 1.5 percent at 1:45 p.m. in Frankfurt, according to all 55 economists in a Bloomberg News survey.

The Bank of England has already begun buying commercial paper through its 50 billion-pound ($71 billion) asset purchase facility, financed with Treasury bill sales.

Policy makers unanimously decided last month that King should seek authority from Darling for quantitative easing by buying government bonds and other securities without funding through debt sales to raise the money supply. The bank didn’t release details of its plans before the decision and an exchange of letters is expected today between King and Darling.

Along with the central bank’s measures, Brown’s government has pledged billion of pounds to shore up Britain’s banking system. Last week he promised 325 billion pounds of support for Royal Bank of Scotland Group Plc’s investments, while Lloyds Banking Group Plc is also in talks on a government asset insurance program.

The U.K. economy contracted 1.5 percent in the fourth quarter, the most since 1980, as consumers curtailed spending. Former central bank Deputy Governor John Gieve said Feb. 20 the nation faces a serious risk” of a decade-long depression as the credit squeeze hampers growth.


TradingEconomics.com, Bloomberg
3/5/2009 5:19:03 AM