Bank of England Clears Hurdle to Begin Quantitative Easing

February 18, 2009

The Bank of England, which cut its Bank Rate at each of the past five meetings and by 400 basis points in all to 1.0%, released minutes from its meeting on February 4-5, when a 50-basis point reduction was authorized.  As in January when the rate also was reduced by 50 basis points, Blanchflower dissented in an 8-1 vote, preferring a decrease of 100 basis points.  The Monetary Policy Committee (MPC) agonized over what a majority felt were diminishing benefits and emerging counterproductive drags from additional rate cuts.  For many, 1.0% is about as low as one can safely go, although markets continue to price in a further drop to 0.50% next month.  As a result of reservations against cutting rates additionally, the MPC by unanimous vote authorized Governor King to write Chancellor Darling to grant formal permission to the MPC to purchase a wide range of assets such as commercial paper and corporate bonds with the express purpose of growing the money supply further and carrying out its mandate to secure 2% CPI inflation in the medium term.  Unless such is done, monetary officials expect the target to be under shot.  The Bank of England revealed that King had indeed already done as instructed and that Darling had given the MPC a green light to proceed with its plan.  Thus, quantitative easing can now start anytime and needn’t be delayed until the Bank Rate rests on zero or is but a fraction above as in the United States.  British M4 had posted 12.0% on-year growth on average over the first ten months of 2008.  Such accelerated to marginally over 16% in November-December.  However, in the year to December, net lending fell by 74% including a 75% drop in net mortgage lending.  Mortgage approvals at the end of 2008 hovered near record lows.  While there was a hint of stabilization, such is occurring at extremely depressed levels.

Click here for minutes from the February 4-5th policymakers’ monthly meeting.

Copyright 2009 Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.



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