Page last updated at 01:48 GMT, Thursday, 8 January 2009

Treasury denies 'more cash' claim

Bank of England
The Bank of England is tipped to further cut interest rates

The government has denied newspaper reports that it is considering printing more money as a tactic to tackle Britain's credit crunch.

It had been reported that such a step was being considered once interest rates drop close to zero.

Treasury sources said that while the move has not been ruled out, it is not currently on the agenda.

The Bank of England is widely expected to cut rates, currently 2%, after the monetary policy committee meets later.

That would mean rates are at their lowest point in the Bank's 315-year history. Ever since 1694, when the Bank was founded, its main interest rate has never fallen below 2%.

'Quantitative easing'

In an interview with the Financial Times on Wednesday the Chancellor Alistair Darling indicated the Bank would have to work "hand in hand" with the Treasury if it wanted to carry out "quantitative easing" - or printing money.

The Bank has to tread a fine line between avoiding deflation and a further weakening of sterling, whilst doing all it can to soften the impact of the recession
Hetal Mehta, Ernst & Young ITEM Club

A central bank printing money to inject into the markets is a strategy known as quantitative easing, which was pioneered by Japan as a way of battling its deflationary problems in the 1990s.

Deflation - where prices regularly fall rather than rise - becomes a greater risk as interest rates head towards zero.

It can be a problem because if people believe that prices are going to fall then they have incentives to postpone buying anything they can, which means there is even less activity in the economy.

On its front page, the Daily Mail says that Labour's "latest big idea" to deal with the recession is to "simply print more money".

The Times also leads on the story, quoting a senior government source who says the option of printing more money is being looked at as a "sensible contingency plan".

In his interview with the FT, Mr Darling said the Treasury would have to be involved in any decision to take the further step of printing money to buy assets.

Such action, he said, "could only be done with the Treasury and the Bank of England working hand in hand, because the two responsibilities just become so close you have to operate together".

George Osborne, the shadow chancellor, said: "Printing money is the last resort of desperate governments when all other policies have failed. It can't be ruled out as a last resort but risks losing control of inflation."

Vince Cable, the Liberal Democrat economic spokesman, said: "If we get into the dire straits of deflation then governments have no choice but to take drastic measures."

Lower rates

While a rate cut is widely expected, there is debate as to how far the Bank will actually go.

Hetal Mehta, economic advisor to the Ernst & Young ITEM Club said the Bank was facing "a balancing act".

"Six months ago, it was juggling slowing economic growth with soaring inflation," he said.

"But, now the Bank has to tread a fine line between avoiding deflation and a further weakening of sterling whilst doing all it can to soften the impact of the recession."

"ITEM believes a 50-basis-point cut in the interest rate would be appropriate. However, with survey data continuing to worsen, a larger cut of 100 basis points, taking the interest rate to 1%, is a distinct possibility."

It is not clear how much of any cut would be passed on to mortgage customers.

HSBC, Lloyds TSB/Cheltenham and Gloucester and Bristol & West are passing on the last one percentage point cut in full for those customers with variable rate mortgages.

But the UK's biggest lender HBOS is only passing on 0.25 of a percentage point.

Even those customers with tracker mortgages - which follow changes in Bank rate - may not see the benefit as many mortgage providers have "collars" below which their tracker rates will not fall.

Meanwhile, any rates cut will mean that Britain's savers will see their interest earnings fall once more.

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