The Bank of England could soon turn to unconventional measures such as quantitative easing to rescue the UK's economy, the Bank's Governor Mervyn King announced last night.
According to King, who was speaking at a conference in Nottingham, extreme measures could soon become necessary following the failure of base rate cuts to make a difference to the falling economy.
Since January last year, the Bank base rate
has fallen from 5.5 per cent to just 1.5 per cent today in desperate bids to quash a recession. And some economists expect the base rate to fall to zero in the coming months, making the prospect of deflation a real issue.
"Despite those big cuts, there remains a risk that inflation will fall below two per cent." Mr King said. "The disruption to the banking system has impaired the effectiveness of our conventional interest rate instrument.
"With Bank Rate already at its lowest level in the Bank's history, it is sensible for the MPC to prepare for the possibility – and I stress that we are not there yet – that it may need to move beyond the conventional instrument of Bank Rate and consider a range of unconventional measures."
The measures in mind include quantitative easing, a tool of monetary policy whereby the Bank of England will inject money into the financial system by buying things like corporate bonds and asset backed securities.
King's speech follows the Treasury's announcement of bank bailout number two, part of which was a £50billion fund that will allow the Bank of England
to buy such assets.
The measures are being compared to printing money, and it has become clear that such drastic measures are required to boost lending between banks which could save the UK's economy from a prolonged recession. Measures which critics believe should have been introduced earlier.
Speaking of a timescale for the introduction of these unconventional measures, King said: "It will be a matter of weeks not days before a programme of purchases can begin, but it will be weeks not months."
Mervyn King's speech came after reports that on Monday, Lord Myners, the banking minister said that the Government's latest plan to insure toxic bank debts could last as long as nine years.
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