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Bank of England votes for 'quantitative easing'

Section: Daily Dispatches

From The Telegraph, London
Wednesday, February 18, 2009

The Bank of England's Monetary Policy Committee has voted unanimously to seek Goverment permission to increase the amount of money in the economy as interest rate cuts lose their power to fight recession.

The 9-0 vote by the MPC was revealed in the minutes of the meeting held on February 5. The Bank's Governor, Mervyn King, will now write to Alistair Darling, the Chancellor, to ask for approval to introduce measures aimed at raising the supply of money in the economy – known as quantitative easing.

The Bank hopes that by increasing the quantity of money in the economy it can encourage banks to increase lending and consumers to start spending.

"The lack of supply credit is the biggest problem facing the UK economy and increasing the supply of central bank money via purchases of government securities should help to loosen these restrictions," said Andrew Goodwin, Senior Economic Adviser to the Ernst & Young Item Club.

At the meeting, the MPC voted 8-1 to cut the main lending rate by half a point to 1pc, the lowest since the Bank was founded in 1694. David Blanchflower, who has long argued the UK faces a deep recession, wanted a full point cut.

However, other members feared that cutting rates further would stop banks and building societies lending with "potentially adverse consequences for the rest of the economy."

Lenders keep a spread between their deposits and lending rates to cover costs and to make a return. The minutes said: "Once those deposit rates were at zero ... banks might decide not to pass on cuts ... in order to mitigate the impact on their profitability."

Ross Walker, UK economist at RBS, said: "The news is the unanimous approval for moving to quantitative easing and seeking the Chancellor's approval." He said while not quite ruling out further cuts, the minutes suggested any further action will be more modest.

Vickey Redwood, UK economist at Capital Economics, said: "The minutes of February's MPC meeting reinforce the message from last week's Inflation Report that a significant further policy easing is required and that quantitative easing is imminent."

The MPC said it was likely that it would want to consider a range of asset purchases in due course and George Buckley, chief UK economist at Deutsche Bank, said he expected to measures to be in place by the March meeting.

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