BoE spends £340m to kick-start frozen lending markets

The Bank of England today said it had spent £340m so far under its asset-buying scheme to kick-start frozen lending markets.

The Bank is buying commercial paper - which is like a corporate bond, or an IOU used by companies to raise funds - in the hope of making it easier for firms to raise cash.

It is making the purchases through the newly-created Asset Purchase Facility (APF) announced in January and funded with £50bn from the Treasury so far.

The Bank hopes the scheme will "channel funds directly to parts of the corporate sector", while boosting the commercial paper market and "removing obstacles to corporate access to capital markets".

But economists expect the pace of APF purchases by the Bank to increase once policymakers move on to so-called "quantitative easing" - effectively printing money - to buy up assets.

Minutes of the Monetary Policy Committee this week revealed that Governor Mervyn King has formally asked Chancellor Alistair Darling for permission to buy Government bonds through the APF with money created by the central bank.

Capital Economics' Vicky Redwood said of today's figures: "(The fund) will start off fairly gradually, but I imagine they will use all the £50bn. So far they have only set up the fund for commercial paper buying... it takes time to get it going."

Policymakers have been forced to resort to such unconventional measures as lending conditions and capital markets remain tight despite interest rates at a record low of 1 per cent.

The Bank - charged with keeping inflation at 2 per cent - is expecting the cost of living to be well below this level for the next three years as the recession impacts on prices.

Minutes of its February meeting said asset purchases would "strengthen the committee's ability to meet the inflation target".