Stimulus measures are succeeding, says Bank

Bank's agents report improved access to credit
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The Independent Online

The quantitative easing programme through which the Bank of England hopes to stimulate the economy is beginning to have some success, with companies finding credit markets easier to access over the past three months, the Bank said yesterday.

The Bank's quarterly report on its asset purchase facility, through which the quantitative easing scheme is being conducted, reveals that its network of agents up and down the country say corporate credit conditions improved during the second quarter of the year.

The Bank's agents said liquidity and price transparency had improved in the corporate bond market and that the amount of short-term debt being issued by companies had declined because many had found it easier to secure long-term finance deals.

The asset purchase facility was launched in February, with the Bank initially issuing Treasury bills in order to finance the purchase of corporate bonds and other private sector debt. The scheme was in effect expanded in March, when the Bank's Monetary Policy Committee voted to launch a £150bn programme of quantitative easing – up to £50bn of that money is earmarked for private sector bonds, while the remainder may be used to buy gilts. The programme is now funded from central bank reserve issuance.

"Market contacts reported that there was some evidence that purchases of corporate bonds by the asset purchase facility had helped to improve turnover and price transparency for eligible bonds," the Bank's report said.

"The continued purchases of assets by the facility during the second quarter of 2009 were accompanied by signs that conditions in corporate credit markets were improving."

Improving corporate access to credit markets is a key aim of the Bank's quantitative easing programme, amid continuing concern that even larger companies are finding bank credit difficult to secure.

Though smaller companies, on behalf of whom Treasury ministers lobbied the banks yesterday, do not use the same instruments, improving liquidity throughout the credit system should boost the economy with businesses of all sizes eventually finding it easier to secure vital financing.

So far, the Bank has opted to use only £125bn of its £150bn quantitative easing budget, with this month's meeting of the Monetary Policy Committee voting not to draw down another chunk of the money until more evidence about the efficacy of the programme was forthcoming.

Yesterday's report is therefore likely to lead to calls for the MPC to continue with its programme when it meets in early August, though in theory the Bank could also choose to return to financing the purchase of private sector debt through Treasury bills rather than quantitative easing.

David Kern, the chief economist at the British Chambers of Commerce, said that last week's miserable GDP figures, which showed that the UK economy had contracted by 0.8 per cent during the second quarter of the year, should serve as a warning to the Bank about the dangers of retreating from its policy too early, despite fears that leaving it too late to wind up the strategy might cause a big increase in inflation.

"There is no room for complacency and suggestions of suspending quantitative easing are misguided," Mr Kern said. "It is important to persevere with an aggressive policy stimulus to ensure the economic downturn does not worsen."

The Bank of England also said yesterday that the sharp rise in gilt yields seen during the second quarter of the year – perceived by some analysts as investors demanding greater rewards because the UK's credit risk was rising – actually reflected expectations of higher interest rates in the future.

It also pointed out that the spread between corporate bond yields and the yields on risk-free assets had narrowed during the second quarter, which suggested that investors saw private sector debt as less risky than in the past.