Helicopter money is on the way in Britain

UK May Expand Toolkit to Halt Recession Slide

By Gonzalo Vina
Bloomberg News
Wednesday, December 10, 2008

http://www.bloomberg.com/apps/news?pid=20601087&sid=aZ5RLad_FpyM&refer=home

LONDON -- The U.K. government and the Bank of England are considering plans to pump billions of pounds into the economy as the bank rescue package and the lowest interest rates since 1951 fail to halt a slide into recession.

The Bank of England and the Treasury are looking at a range of options, including pumping money into the economy by bolstering bank reserves, according to a spokesman at the Treasury. The strategy, known as "quantitative easing," was last used by Japan at the start of the decade.

Prime Minister Gordon Brown's government is drawing up new plans to revive lending and economic growth after banks refused to pass on the biggest interest rate reductions made by the Bank of England. With the central bank’s key rate at 2 percent, matching the lowest ever, Governor Mervyn King may need to step beyond his traditional policy tools.

Chancellor of the Exchequer Alistair Darling, speaking to lawmakers in Parliament today, suggested such a move is over the horizon for now, noting that the central bank’s interest rate isn’t yet at zero. He left open the door for action if banks keep choking off credit.

"The situation is full of uncertainties," Darling said in response to a question at the Treasury Committee. "We will always be in a position where we will act as we need to. Interest rates are still 2 percent. We haven't got to a position where they're zero yet."

... Clearest Sign

The comments are the clearest sign yet that he is frustrated that banks are rationing credit even after a 50 billion pound ($74 billion) program to rescue HBOS Plc, Royal Bank of Scotland Group Plc, and Lloyds TSB Group Plc.

The Bank of England cut the benchmark interest rate to 2 percent on Dec. 4, the lowest level since 1951 and down from 5 percent as recently as Oct. 7.

The official said it is prudent for the government and the central bank to consider all options as the Bank of England's benchmark lending rate approaches zero. He denied that a decision has been made and declined to be identified in line with government policy.

Federal Reserve Chairman Ben S. Bernanke has also signaled he's ready to use less conventional policies, such as buying Treasury securities, to revive the economy, because his room to lower the main U.S. rate from the current 1 percent level is "obviously limited."

Separately, the Bank of England announced that Paul Tucker will become the Bank of England's next deputy governor for financial stability in March, replacing John Gieve.

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