We must print more money, says Bank

Governor appeals for urgent action to salvage Britain’s shrinking economy

The Bank of England is to start ‘printing’ new money for the first time in 30 years as it runs out of options to kick-start the economy. The Governor of the Bank of England will write to the Chancellor within days to get permission for the unprecedented action.

The Bank will create the money by buying government and corporate bonds from financial institutions for new supplies of sterling. Termed “quantitative easing”, it is the modern equivalent of printing money. It is designed to put more cash into the economy, creating more money for companies to spend and for banks to lend.

The move marks the most dramatic step taken yet by the Bank as it tries to stop the deepening recession turning into a slump. One of the main reasons for the financial crisis has been the unwillingness of banks to lend money after the sub-prime losses in the US.

Critics have branded the action irresponsible and said it could stoke inflation and spark a run on the pound but the severity of the recession has driven the usually conservative central bank to throw caution to the wind.

The minutes of this month’s Monetary Policy Committee meeting, released yesterday, showed a unanimous vote to request the go-ahead from the Chancellor. Alistair Darling is expected to reply immediately to the Governor’s letter in an exchange that will cap urgent work at the Bank and the Treasury to allow purchases to start as soon as possible.

Andrew Goodwin, a senior economic adviser to the Ernst & Young ITEM Club, said: “It is crucial that the Bank be allowed to swiftly and boldly implement this policy. The lack of supply of credit is the biggest problem facing the UK economy and increasing the supply of central bank money via purchases of government securities should help to loosen these restrictions,” Mr Goodwin said.

Under measures announced last month, the Bank is already authorised to buy up to £50bn of assets to help unblock frozen markets but without increasing the supply of money to the economy. The Bank’s rapid move to the extreme option of creating new money in exchange for the bonds underlines the increasing sense of crisis.

The Bank’s nightmare is a sustained period of deflation – general falling prices – which would prolong and deepen the recession by encouraging consumers and businesses to delay spending. A short period of falling prices is expected later this year, driven by dropping energy costs, but with inflation falling and the economy contracting quicker than forecast, the Bank wants to act to prevent a downward spiral.

The results of a CBI survey released yesterday showed manufacturers’ order books shrinking at their fastest rate since 1992 and companies expecting to cut output at a pace not seen for nearly 30 years. The measure of export orders slumped to its lowest since November 2001, quashing hopes that sterling’s recent sharp fall would boost overseas sales for British businesses.

The Bank has never taken such a radical step to boost the money supply before but similar measures were used by Japan in the early 1990s and during the 1970s when the supply of sterling was increased. Critics argue that creating new money did not prevent Japan’s “lost decade” of stagnation.

The Bank has started a softening-up exercise to rebuff accusations that quantitative easing amounts to recklessly turning on the printing presses in a way that has driven countries such as Zimbabwe into hyperinflation.

Charles Bean, the deputy governor for monetary policy, said on Monday the aim was to boost the supply of money and credit to achieve the Bank’s 2 per cent inflation target and not to finance a government budget deficit as happens in corrupt regimes.

With the economy “undergoing a significant and sustained adjustment” and inflation heading for negative territory, the Monetary Policy Committee decided it would need more than rate cuts to limit the recession and keep inflation close to its 2 per cent target in the medium term. The minutes showed doubts growing about the impact of further interest-rate cuts as the committee agreed to slash borrowing costs to a record low of 1 per cent.

It voted 8-1 in favour of the half-point reduction. David Blanchflower called for a one-point fall but the majority rebuffed his call for a bigger cut because it could deter banks from lending.

“There was a great deal of uncertainty about what would happen to banks’ and building societies’ ability and willingness to lend at low levels of interest rates,” the minutes said. “There might even be a point where further cuts in bank rate could have an adverse impact on the economy.” Mr Blanchflower said past errors were due to cutting too late and not too soon.

Start your day with The Independent, sign up for daily news emails
ebooks
ebooksAn introduction to the ground rules of British democracy
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Recruitment Genius: Mortgage Advisor - OTE £95,000

£40000 - £95000 per annum: Recruitment Genius: This is an exciting opportunity...

SThree: Trainee Recruitment Consultant

competitive: SThree: Are you passionate about sales?Do you have a keen interes...

Recruitment Genius: Loan Adviser - OTE £30,000

£17000 - £30000 per annum: Recruitment Genius: This is an exciting opportunity...

Recruitment Genius: Sales Assistant / Buyer

£15000 - £17000 per annum: Recruitment Genius: This company offers a range of ...

Day In a Page

Isis in Syria: Influential tribal leaders hold secret talks with Western powers and Gulf states over possibility of mobilising against militants

Tribal gathering

Influential clans in Syria have held secret talks with Western powers and Gulf states over the possibility of mobilising against Isis. But they are determined not to be pitted against each other
Gaza, a year on from Operation Protective Edge: A growing population and a compromised and depleted aquifer leaves water in scarce supply for Palestinians

Gaza, a year on from Operation Protective Edge

A growing population and a compromised and depleted aquifer leaves water in scarce supply for Palestinians
Dozens of politicians, bureaucrats and businessmen linked to Indian bribery scandal die mysteriously

Illnesses, car crashes and suicides

Dozens of politicians, bureaucrats and businessmen linked to Indian bribery scandal die mysteriously
Srebrenica 20 years after the genocide: Why the survivors need closure

Bosnia's genocide, 20 years on

No-one is admitting where the bodies are buried - literally and metaphorically
How Comic-Con can make or break a movie: From Batman vs Superman to Star Wars: Episode VII

Power of the geek Gods

Each year at Comic-Con in San Diego, Hollywood bosses nervously present blockbusters to the hallowed crowd. It can make or break a movie
What do strawberries and cream have to do with tennis?

Perfect match

What do strawberries and cream have to do with tennis?
10 best trays

Get carried away with 10 best trays

Serve with ceremony on a tray chic carrier
Wimbledon 2015: Team Murray firing on all cylinders for SW19 title assault

Team Murray firing on all cylinders for title assault

Coaches Amélie Mauresmo and Jonas Bjorkman aiming to make Scot Wimbledon champion again
Wimbledon 2015: Nick Bollettieri - Vasek Pospisil must ignore tiredness and tell himself: I'm in the quarter-final, baby!

Nick Bollettieri's Wimbledon Files

Vasek Pospisil must ignore tiredness and tell himself: I'm in the quarter-final, baby!
Ashes 2015: Angus Fraser's top 10 moments from previous series'

Angus Fraser's top 10 Ashes moments

He played in five series against Australia and covered more as a newspaper correspondent. From Waugh to Warne and Hick to Headley, here are his highlights
Greece debt crisis: EU 'family' needs to forgive rather than punish an impoverished state

EU 'family' needs to forgive rather than punish an impoverished state

An outbreak of malaria in Greece four years ago helps us understand the crisis, says Robert Fisk
Gaza, a year on from Operation Protective Edge: The traumatised kibbutz on Israel's front line, still recovering from last summer's war with Hamas

Gaza, a year on from Operation Protective Edge

The traumatised kibbutz on Israel's front line, still recovering from last summer's war with Hamas
How to survive electrical storms: What are the chances of being hit by lightning?

Heavy weather

What are the chances of being hit by lightning?
World Bodypainting Festival 2015: Bizarre and brilliant photos celebrate 'the body as art'

World Bodypainting Festival 2015

Bizarre and brilliant photos celebrate 'the body as art'
alt-j: A private jet, a Mercury Prize and Latitude headliners

Don't call us nerds

Craig Mclean meets alt-j - the math-folk act who are flying high