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| Version 0 | Version 1 |
|---|---|
| UK interest rates to fall further | UK interest rates to fall further |
| (about 6 hours later) | |
| The Bank of England is expected to cut interest rates to a fresh all-time low and start increasing the money supply in an attempt to revive the economy. | |
| Most analysts believe the Bank will cut rates to 0.5% from 1%. An announcement is expected at 1200 GMT. | |
| As rates get closer to zero, the Bank runs out of room to cut the cost of borrowing to stimulate the economy. | As rates get closer to zero, the Bank runs out of room to cut the cost of borrowing to stimulate the economy. |
| As a result, economists suggest that it will opt to expand the money supply by up to £150bn ($212bn). | As a result, economists suggest that it will opt to expand the money supply by up to £150bn ($212bn). |
| Britain has been in recession since last year, for the first time in nearly two decades, as the global financial and economic crisis intensifies. | Britain has been in recession since last year, for the first time in nearly two decades, as the global financial and economic crisis intensifies. |
| Quantitative easing | Quantitative easing |
| The bank may not necessarily be printing banknotes. It would buy banks' assets - such as government securities (gilts) and corporate bonds - without borrowing to fund the purchases, in effect boosting the money supply. | The bank may not necessarily be printing banknotes. It would buy banks' assets - such as government securities (gilts) and corporate bonds - without borrowing to fund the purchases, in effect boosting the money supply. |
| The policy is called quantitative easing. Similar measures were implemented in Japan at the beginning of the decade and had limited success. | The policy is called quantitative easing. Similar measures were implemented in Japan at the beginning of the decade and had limited success. |
| Increasing the supply of central bank money via purchases of government securities should help to loosen these restrictions and boost the supply of money and credit Hetal Mehta, Ernst & Young ITEM Club Q&A: Quantitative easing | Increasing the supply of central bank money via purchases of government securities should help to loosen these restrictions and boost the supply of money and credit Hetal Mehta, Ernst & Young ITEM Club Q&A: Quantitative easing |
| Philip Shaw, chief economist at Investec, said that if the BoE decided to try quantitative easing, it "should in principle encourage the banks to lend to private sector agents such as households and businesses, stocking monetary growth and stimulating activity". | Philip Shaw, chief economist at Investec, said that if the BoE decided to try quantitative easing, it "should in principle encourage the banks to lend to private sector agents such as households and businesses, stocking monetary growth and stimulating activity". |
| However, many analysts are uncertain about whether boosting of the domestic money supply would be effective. | However, many analysts are uncertain about whether boosting of the domestic money supply would be effective. |
| The Bank of England revealed in February it had asked for government approval for quantitative easing. | The Bank of England revealed in February it had asked for government approval for quantitative easing. |
| Chancellor Alistair Darling hinted in a Tuesday interview that there was a possibility that boosting of the money supply would start this week. | Chancellor Alistair Darling hinted in a Tuesday interview that there was a possibility that boosting of the money supply would start this week. |
| Hetal Mehta, senior economic advisor to the Ernst & Young ITEM Club, said: "Credit starvation 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 and boost the supply of money and credit." | Hetal Mehta, senior economic advisor to the Ernst & Young ITEM Club, said: "Credit starvation 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 and boost the supply of money and credit." |
| Key problem | Key problem |
| There have been concerns that cutting interest rates further could hit banks' profits, leading to a further lending squeeze, which in turn would lower chances for an economic recovery. | There have been concerns that cutting interest rates further could hit banks' profits, leading to a further lending squeeze, which in turn would lower chances for an economic recovery. |
| Shelagh Heffernan, Professor of Banking and Finance, said: "Dearth of loan supply is the key problem, not weak demand. Lower rates will not encourage more lending. | Shelagh Heffernan, Professor of Banking and Finance, said: "Dearth of loan supply is the key problem, not weak demand. Lower rates will not encourage more lending. |
| "Raising rates would attract more deposits which banks could lend on, and make lending more attractive." | "Raising rates would attract more deposits which banks could lend on, and make lending more attractive." |
| But Hetal Mehta disagreed: "While another rate cut would further squeeze banks' profitability and might reduce their incentive to lend, it would have the benefit of supporting spending for corporate and other borrowers with floating rate debt, particularly those with tracker mortgages." | But Hetal Mehta disagreed: "While another rate cut would further squeeze banks' profitability and might reduce their incentive to lend, it would have the benefit of supporting spending for corporate and other borrowers with floating rate debt, particularly those with tracker mortgages." |