Page last updated at 15:12 GMT, Wednesday, 18 February 2009

Bank aiming to boost money supply

Woman standing before the Bank of England building
The Bank is hoping to get the commercial banks lending again

The Bank of England is seeking approval from the government for a series of measures aimed at increasing the supply of money in the economy.

Technically known as quantitative easing, the aim of the process is to try to increase the amount of funds in the UK banking system.

The hope is that this will make it easier for the commercial banks to start to increase their lending levels.

Analysts said the Bank could start to introduce measures within days.

These are likely to include the purchase of both government and corporate bonds.

The bank's decision to introduce quantitative easing was unanimously agreed by its nine-member Monetary Policy Committee (MPC) at their meeting earlier this month.

The released minutes also showed that the MPC voted 8-1 to cut interest rates to 1% in February from January's 1.5%.

'Great uncertainty'

The Bank hinted that increased quantitative easing was necessary, as cutting rates alone may now not be enough to help the economy out of recession.

WHAT IS QUANTITATIVE EASING?

Traditional 'QE' involves buying just government securities, or gilts. However, the MPC will be looking to buy high quality corporate securities as well

Stephanie Flanders, BBC economics editor

"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 said.

"There was a great deal of uncertainty about what would happen to banks' and building societies' ability and willingness to lend at low levels of interest rates."

Its admission comes after a number of business groups, including the Federation of Small Businesses, said the recent rate cuts were not working, as the commercial banks were still reluctant to lend.

"The vote on rates was in line with expectations but the most important aspect of today's minutes was the unanimous vote to write to the Chancellor to seek his consent to implement quantitative easing," said Andrew Goodwin, senior economic advisor to the Ernst & Young Item Club.

"Item believes that it is crucial that the Bank be allowed to swiftly and boldly implement this policy."

'Critical need'

The British Chambers of Commerce (BCC) said the MBC must now be bold.

"There is a critical need for aggressively pursuing quantitative and credit easing," said BCC chief economist David Kern.

"Businesses must be reassured that the MPC and the Bank will move in that direction."

Official data released on Tuesday showed that UK consumer price inflation stood at 3% in January, falling from 3.1% in December, but still above the government's 2% target.

The UK economy contracted by 0.6% between July and September, and by 1.5% from October to December.

Meanwhile, unemployment rose to 1.97 million in the three months to December 2008 - the highest level since 1997.

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