The Bank of England yesterday doused hopes that it would move quickly to buy up large volumes of company debt as it set out plans to purchase corporate bonds, commercial paper and Government-sponsored bank debt.
In an exchange of letters between the Bank's Governor, Mervyn King, and the Chancellor, the Treasury authorised the central bank to spend up to £50bn to buy up credit assets in the market to make it easier and cheaper for companies to raise finance.
In his letter, Mr King said: "I expect the amounts of assets purchased to increase gradually in the early stages of the facility. This will provide scope to assess the impact of those operations on market liquidity." But he added that the Bank's willingness to buy assets could improve market confidence and liquidity.
The purchases will be funded by the Debt Management Office issuing Treasury bills so that the money supply is not increased. But the letters signalled that the Bank was ready to buy up securities without issuing new debt, effectively printing money to boost the economy.
Simon Ward, chief economist at New Star Asset Management, said: "It doesn't seem to be anything comparable with what the [US] Fed has been doing. I was hoping that they would get started with £50bn fairly soon and expand to something like £200bn."
Mr Ward also said he was puzzled by the inclusion of bank debt covered by the Government's Credit Guarantee Scheme because the market for that debt was not frozen and it the move would not directly increase the flow of credit to companies. The Bank will set out the mechanisms for buying assets in a market notice next week.
David Blanchflower, a key member of the Bank's Monetary Policy Committee, last night called for a more rapid easing of monetary policy as he warned that the recession may prove to be worse than the one that crippled the economy in the early 1980s. Mr Blanchflower has been the gloomiest member of the MPC and has consistently voted for bigger rate cuts than those agreed.
In a speech, he said interest rates could hit zero but that "credit easing" of the kind planned by the bank could be carried out before that happened. He warned that economic forecasts had underestimated the severity of past recessions and that the current recession could last all year with a slow recovery to follow.
"There is now a plausible possibility that the current UK recession may be even more severe than the recession in the early 1980s," he said. "I believe monetary policy needs to be loosened further and quickly."
The MPC meets next week and is expected to cut rates by 50 basis points to a new record low of 1 per cent.Reuse content