BoE cuts rates to 0.5 percent, to pump money into economy

BoE cuts rates to 0.5 percent, to pump money into economy


LONDON (Reuters) - The Bank of England cut interest rates by 50 basis points to a record low of 0.5 percent on Thursday, and said it would pump 75 billion pounds of new money into buying assets, mostly gilts, to combat the recession.
UK government bonds soared on the news the BoE would be starting so-called quantitative easing -- effectively printing money -- on such an aggressive scale over the next three months. The asset buying program equates to around 5 percent of GDP.
Doubts remain over whether it will work but the BoE may have had no choice -- the economy shrank at its fastest pace in nearly 3 decades at the end of 2008, house prices are sinking at record rates and hundreds of thousands of jobs have disappeared.
"The world economy has turned down very rapidly since last Autumn, the amount of money is not growing at all, and the economy is in a recession, so we need to increase the supply of money," BoE Governor Mervyn King said on Sky Television.
The government set the BoE an overall limit of 150 billion pounds for new money it can create, though 50 billion of this is money which had been previously earmarked for the Asset Purchase Facility but will now be unfunded.
Quantitative easing has previously only been tried in Japan in the early part of the decade with limited success. But it has now become a watchword for central banks everywhere as interest rates near zero in the most serious world downturn for decades.
The European Central Bank also cut interest rates by 50 basis points to a record low of 1.5 percent on Thursday. U.S. interest rates are between 0 and 0.25 percent and Japan's are at 0.1 percent.
Economists said the BoE would stop at 0.5 percent, after cutting by a total of 4.5 percentage points in six months, due to worries that very low rates could start having a counter-productive effect by hitting bank profits.
"We expect this to be the final reduction in policy rates, with Bank Rate maintained at this level for a considerable period," said Ross Walker, UK economist at RBS. "Overall, the scale and timing of the QE operations appears significant."
"The lasting benefits for credit availability and demand are much more uncertain but, given the severity of the macroeconomic and financial backdrop, it is worth a try."