05 března 2009

5/3 Bank of England cuts interest rates

The Bank of England cut 50 bps from already historically low rates of 1.00% to bring the central bank's rate to 0.50%. This move was widely expected. Of more interest were the announcements related to the bank's inexorable move toward "nontraditional" monetary policy in the form of quantitative easing: the outright purchase of assets aimed at easing credit markets. Today the bank declared that it would buy 75 billion pounds of assets over the next three months using its already announced asset purchase facility.

Concerning the mix of assets to be purchased, the bank said it would purchase mostly medium and long-term gilts, but also some private assets. The pound was relatively stable after the announced measures, as they were largely expected. Still, the most interesting aspect of this is the announcement that the BoE will be purchasing government debt, as this represents outright debt monetization, which can be considered one of the most desperate forms of money printing by a central bank. Not even the US Fed has taken this step yet, though it has declared that it is considering the effects of doing so.

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