Bank of England to buy bonds and loans in first step towards quantitative easing

The iconic columns of the Bank of England in London. Photo: EPA

Bank of England to buy bonds and loans in first step towards quantitative easing
The Government has taken the first step towards quantitative easing by authorising the Bank of England to buy up to £50bn of private sector assets as part of a wider drive to get banks lending again.

By Angela Monaghan Last Updated: 2:52PM GMT 19 Jan 2009

Under the scheme the Bank will be able to buy corporate bonds and consumer loans under the Government's new credit guarantee scheme.
Mervyn King, the Bank's Governor, said the new facility would "provide an important additional tool to improve financing conditions in the economy."
The move is not quantitative easing as it does not involve an increase in the money supply, but some said it could mark the beginning of a shift in that direction.
"This framework could readily evolve into full-blown quantitative easing - we would expect it to do so given the proximity of Bank Rate a de facto zero bound and deteriorating economic conditions, perhaps as soon as March/April," said Ross Walker, economist at Royal Bank of Scotland.
Quantitative easing, also known as printing money, is a more unconventional tool available to the Bank beyond interest rates as it attempts to halt the pace of economic decline in the UK.
The programme announced by the Treasury today comes into effect on February 2, before the next vote on interest rates by the Bank's Monetary Policy Committee on February 5.
"In effect one can argue that this makes the Bank of England the UK's 'bad bank', even if there are some limits to the risk that is being transferred," said Marc Ostwald, strategist at Monument Securities. "Cynics could also argue that Brown and Darling are merely passing the buck to the MPC in terms of exit strategy."
It is part of a broader programme announced by the Treasury this morning allow banks to exchange cash or shares for a Government guarantee on their "toxic" debts. As part of the rescue package, the taxpayer has taken an even bigger stake in Royal Bank of Scotland
The package comes before the first official confirmation on Friday that the UK is in recession. The Office for National Statistics is expected to reveal a sharp decline in gross domestic product in the final quarter of 2008, following a 0.6pc contraction in the third quarter. A technical recession occurs when the economy shrinks for two successive quarters.

http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/4288754/Bank-of-England-to-buy-bonds-and-loans-in-first-step-towards-quantitative-easing.html