Page last updated at 10:39 GMT, Wednesday, 18 March 2009

Bank unanimous over UK rate cut

Exterior of the Bank of England
Low rates have forced the Bank to use unconventional measures

A decision to cut UK interest rates to a record 0.5% low was agreed by all nine members of the Bank of England's rate-setting committee, minutes show.

There was also unanimous agreement to create 75bn of new money - known as quantitative easing - to try to revive lending and the battered economy.

But there was uncertainty about the effects of the policy, the Monetary Policy Committee's (MPC) minutes said.

UK interest rates have been reduced six times since October last year.

Bleak backdrop

In an interview given on the day that the rate cut and the programme of quantitative easing was approved, Bank of England governor Mervyn King had said that quantitative easing would work, but admitted it was unknown how long it would take to have an effect.

GUIDE TO BANK'S KEY MOVES

Rates were cut to 0.5% - the lowest point in the Bank's 315-year history.

Click here for our in-depth guides to how very low rates will affect your savings and your mortgage

The Bank also signalled the start of an untried policy - quantitative easing - to try and kick-start lending.

Read our basic explanation of how quantitative easing works.

And our analysis of how it worked (or didn't) when Japan tried it in 2001

The minutes of the MPC meeting said the Bank had agreed to buy up assets from British financial institutions which were not banks - such as pension funds and life insurers - because they were most likely to use the money to buy other assets.

The move, along with the further rate cut, was made after the latest economic data suggested the UK economy would shrink sharply over 2009, with inflation far below the government's official 2% target.

"Even if GDP growth rates were recovering by the end of 2009, this was likely to be taking place against a backdrop of a significant degree of spare capacity, and in particular a high and rising level of unemployment," the minutes said.

The latest unemployment figures released on Wednesday showed that the jobless total had risen above two million for the first time since 1997.

Debate

The aim is for the 75bn of quantitative easing to kick-start the economy.

"By increasing the supply of money in the economy, these operations should, over time, cause nominal spending to rise," the minutes said.

The minutes showed that the MPC members debated a quantitative easing programme of between 50bn and 100bn.

Those arguing for the lower figure highlighted the "high degree of uncertainty" over the impact of the operations.

However, those advocating the larger figure noted that inflation risks "were weighted to the downside", and if the first injection was too small, "there was a risk that observers would wrongly infer that such asset purchases were not an effective tool".

On balance, the MPC judged that an initial programme of 75bn was "appropriate".

"There is a sense of urgency with implementing quantitative easing," said Lena Komileva, market economist at Tullett Prebon.

"Although the scale of disagreement about the amounts suggests some uncertainty about how effective this will be at the outset."



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