MPC unanimous on 'quantitative easing'

By THIS IS MONEY
Updated: 07:29 EST, 18 March 2009

Rate-setters voted unanimously to create £75bn in new money and slash interest rates to 0.5%, it was disclosed today.

Unanimous: The MPC gave the green light to 'print money'

The Bank of England's monetary policy committee settled on the £75bn figure amid uncertainty over the impact of the so-called quantitative easing (QE) programme, minutes of their meeting two weeks ago showed.

The unprecedented decision from rate setters comes against the backdrop of a dire economic climate.

'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.

With inflation set to fall well below the Bank's 2% benchmark over the coming months as the recession takes hold, the latest policy moves are deemed necessary to bring it back to target.

Under QE, the Bank is buying assets from banks and other institutions using newly-created money to boost the money supply with banks still reluctant to lend.

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

Some members argued for smaller amounts of central bank money - around £50bn - to be created amid caution over the effect of the measures.

Other members pressed for larger amounts - up to £100bn - saying that if the first injection was too small, 'observers would wrongly infer that such asset purchases were not an effective policy tool'.

These members argued that 'the costs of doing too little at the start were arguably greater than the costs of doing too much'.

Despite some concerns over the impact of a further rate cut on the margins of banks, the MPC also decided that lower borrowing costs would help boost the money supply. The minutes showed there were no calls for a rate cut this month to lower than 0.5%.

Howard Archer, economist at City research firm IHS Global Insight, said: 'The minutes of the March MPC meeting suggest that the bank is now done with cutting interest rates, with even David Blanchflower being in favour of having rates at 0.50%.

'Interest rates seem likely to remain at 0.50% until well into 2010, given the ongoing deep travails of the economy and substantial risk of extended below-target consumer price inflation.'