The Bank of England will start pumping newly created money into the economy today by buying £2 billion in gilts as it embarks on “quantitative easing” in an effort to boost the economy.
The central bank, which has already slashed interest rates by 4.5 percentage points to a record low of 0.5 per cent over the past six months, said last week that it would initially pump £75 billion into the economy via twice-weekly gilt auctions, but has permission from Alistair Darling, the Chancellor, to create another £75 billion if it needs to.
Mervyn King, the Governor of the Bank, indicated last week that the Bank would continue this course of action until the lending markets became unglued.
The first auction, at midday today, will allow pension funds and other institutional investors that hold Government bonds — otherwise known as gilts — to sell these to the Bank in return for cash.
It is hoped that after the auctions take place, the new money will be placed in their accounts with UK banks, boosting the banks’ deposit bases and, hopefully, allowing them to go out and lend more in the wider economy.
But later this afternoon, at 2pm, the second stage of the “reverse-auction” will allow banks to participate directly, selling gilts that they hold to the Bank.