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Bank of England mulls “nuclear option” of cash injection

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Edmund Conway
London Telegraph
Friday, Dec 05, 2008

The Bank of England is working on radical plans to inject cash directly into the economy – the nuclear option to be used only when interest rates approach zero.

In what would be a major departure for British monetary policy, the Bank is considering pressing the button on printing presses by engaging in a so-called policy of quantitative easing. It emerged after the Monetary Policy Committee cut borrowing costs by 1pc to just 2pc – the lowest level since 1951.

In the statement published alongside its decision, the Bank warned that “it was unlikely that a normal volume of [bank] lending would be restored without further measures.”

The measures under consideration include direct purchases of assets, such as government debt or commercial investments, by the Bank or the Treasury, as well as expanding the Bank’s balance sheet, a means of pumping extra cash into the banking sector.

The radical proposals, which are currently being explored by Bank experts, could be put into action within weeks, although they would have to be vetted by the Treasury, which is thought to remain sceptical. The main obstacle is that the policy could be found to conflict with European Union laws on how governments manage their budgets.

However, added weight was given to the proposals by European Central Bank President Jean-Claude Trichet, who seemed to hint in the press conference to announce the ECB’s 75 basis point rate cut yesterday that it may also consider “nuclear options”.

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This article was posted: Friday, December 5, 2008 at 5:16 am

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