BoE seeks more authority to create money

[February 18, 2009]  LONDON (AP) -- The Bank of England revealed Wednesday that its policy makers had unanimously agreed to ask the government for the authority to create money in a bid to kick-start the economy as its ability to cut interest rates further dwindles.

The minutes of the monetary policy committee showed that eight of its nine members voted in favor of the half a percentage point cut to 1 percent earlier this month, with one member instead plumping for a greater full percentage point cut that would have brought the rate to 0.5 percentage points.

With little headroom left on the base rate, the committee also voted unanimously to seek government approval for measures aimed at raising the supply of money in the economy.

This process, known as quantitative easing, is aimed at helping increase the level of funds in the banking system to boost lending by commercial banks.

Bank governor Mervyn King had indicated last week the bank could turn to quantitative easing tactics imminently, as he warned rate cuts were already becoming less effective.

"To the extent that further cuts in bank rate could not inject sufficient stimulus, the committee would need to use alternative policy instruments," the minutes of the early February meeting said.

The bank will in effect create money to buy up government securities and private sector assets in a bid to boost the economy by improving liquidity in markets, allowing banks to offer more credit.

The move would be on top of the bank's existing 50 billion pound ($71 billion) fund to purchase assets, which uses borrowed -- rather than created -- money.

"In the present environment, where particular credit markets were not functioning normally, it was appropriate to consider increasing the supply of central bank money by more unconventional types of asset purchases," the committee said. "These measures might help to change banks' behavior and boost the broad supply of money, which could provide a material stimulus."

The bank has cut rates five times since October, bringing rates to the lowest level in its 315-year history, and the committee voiced fears that a larger cut this month could have impacted on bank profitability.

"At very low rates of interest, the stimulus that a reduction in bank rate could provide was likely to be much reduced," the minutes said. "Indeed, there might even be a point at which further cuts in bank rate could have an adverse impact on the economy, since banks and building societies maintained a spread between their deposit and lending rates to cover the costs of providing banking services and to make a return on capital."

The Bank of England's forecasts, published last week, show the economy will contract at an annual 4 percent rate by the end of the first quarter and inflation will slow to 0.5 percent at the end of next year.

Official figures out Tuesday showed a smaller-than-expected drop in annualized inflation to 3 percent in January, from 3.1 percent in December, but many economists still believe Britain is headed for destabilizing deflation.

However, arch-dove David Blanchflower said rates should be lowered as far as possible "without delay," arguing that at least some of the larger cut would be passed on.

"Historically, errors had been made by cutting too late rather than too soon," the U.S.-based policy maker argued, according to the minutes.

[Associated Press; By JANE WARDELL]

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