Published: Thu, 05 Mar 2009 13:14:25 +0100

BOE Cuts Rates to 0.50%; Will Buy £75 Billion in Assets Using its Balance Sheet

(CEP News) - As widely expected, the Bank of England cuts its benchmark interest rate by 50 bps to a new record low of 0.50% and pledged to begin purchasing Gilts by using its balance sheet.

The BOE pledged to purchase £75 billion at its Asset Purchase Facility by using the central bank's balance sheet rather than the original plan to finance the APF by using short debt term from the Treasury, adding that "It is likely that the majority of the overall purchases by value over the next three months will be of gilts."

The move comes as a result of an exchange of letters between the central bank and the Treasury.

Comments on inflation and growth in the Bank of England's accompanying statement painted a bleak picture of the economy with downside risks "of undershooting the 2% CPI inflation target in the medium term," and ongoing declines in growth with higher unemployment in the region.

The BOE also said a "very low level of Bank Rate could have counter-productive effects on the operation of some financial markets and on the lending capacity of the banking system," but that it decided to cut rates despite this fact.

Going forward, the central bank said it plans to monitor the effectiveness of its new efforts to boost money supply and could adjust "the speed and scale of purchases as appropriate."

By Erik Kevin Franco, efranco@economicnews.ca, edited by Stephen Huebl, shuebl@economicnews.ca