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UK economy could receive £150billion cash injection from Bank of England

06 March 2009 / by Rachael Stiles
In conjunction with its base rate announcement yesterday, the Bank of England also issued a statement which said it will be injecting £75billion into the economy, with the possibility of a further £75billion.

As part of the Government's quantitative easing, the money would come in the form of an asset purchase programme, which would see the issuance of central bank reserves to put up the cash.

Continuing "depressed confidence" and "problems in the international credit markets", a sharp drop in output, falling consumer spending, a further decline in business investment and persistent tightness in the credit markets indicate that further action is needed, the Bank said.

Six months ago, the Bank's Monetary Policy Committee was coming around to the idea that soaring inflation could no longer hamper the need for cuts in the base rate, but now, it says, "inflation is likely to fall below the 2% target by the second half of the year."

After six consecutive cuts of at least half a percentage point, the base rate has fallen from five per cent last September to just 0.5 per cent this month.

But the Committee recognises that this cut could cause inflation to keep falling, and therefore "resolved to undertake further monetary actions, with the aim of boosting the supply of money and credit" and thus raise spending to a level consistent with meeting inflationary targets in the medium term.

"The Bank of England remains committed to improving liquidity in credit markets that are currently not functioning normally," the Bank's governor Mervyn King wrote in a letter to the Chancellor Alistair Darling, explaining his reasons for using asset purchases for monetary policy purposes.

In his reply, the Chancellor said that "in the current circumstances the MPC should be given the option to finance purchases under the Facility using Central Bank Money."

Darling also said that he will allow the Bank to use up to £150billion for the program, but so far the Bank has only said that it will use £75billion of that allowance.

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