Bank of England Cuts Rates, Euro Continues Slide, and the BoE Starts a $105 Billion Asset Repurchase Program

Slash and burn

March 5 (Bloomberg) — The Bank of England reduced the benchmark interest rate to the lowest ever and said it would start purchasing 75 billion pounds ($105 billion) in assets, printing money to fight the recession.

The bank’s nine-member panel, led by Governor Mervyn King, cut the rate a half point to 0.5 percent, the lowest since the bank was founded in 1694. The decision matched the median forecast of 60 economists in a Bloomberg News survey.

“In these highly uncertain times, there are merits to stimulating the economy through a variety of different channels,” King wrote in a letter to Chancellor of the Exchequer Alistair Darling dated Feb. 17 and published today.

King’s Monetary Policy Committee wants to pump newly printed money into the economy to alleviate a worsening recession as interest rates approach zero and lose their potency. Prime Minister Gordon Brown yesterday called on nations around the world to follow the U.S. and U.K. lead by cutting borrowing costs and spending more to battle the recession.

“We’re moving into a new world in the U.K. from interest- rate adjustment to quantitative easing,” said Charles Goodhart, a former Bank of England policy maker. “It’s a great deal more uncertain how things will be done. This month what the MPC says is going to be much more important than what they do.”

Bank Statement

In a statement accompanying the decision, the bank said it may take up to three months to carry out the asset purchases. Most of the assets will be U.K. government bonds known as gilts. The bank will hold a open market operation tomorrow.

The Bank of England has now reduced the key rate 4.5 percentage points since October. The U.S. Federal Reserve kept its benchmark at a range of zero to 0.25 percent last month. The European Central Bank will probably cut its rate a half- point to 1.5 percent at 1:45 p.m. in Frankfurt, according to all 55 economists in a Bloomberg News survey.

Chancellor of the Exchequer Alistair Darling said in a March 3 newspaper interview that the central bank has the necessary “levers” to print money and may decide this month that it needs to use them.

The Bank of England has already begun buying commercial paper through its 50 billion-pound ($71 billion) asset purchase facility, financed with Treasury bill sales.

Policy Makers

Policy makers unanimously decided last month that King should seek authority from Darling for quantitative easing by buying government bonds and other securities without funding through debt sales to raise the money supply. The bank didn’t release details of its plans before the decision and an exchange of letters is expected today between King and Darling.

“It seems to be much more messy than simply voting on the bank rate,” David Tinsley, an economist at National Australia Bank in London, said before today’s announcement. “I’d expect to see a much more concrete outline of what they’ll do along with the rate decision.”

Along with the central bank’s measures, Brown’s government has pledged billion of pounds to shore up Britain’s banking system. Last week he promised 325 billion pounds of support for Royal Bank of Scotland Group Plc’s investments, while Lloyds Banking Group Plc is also in talks on a government asset insurance program.

“Let us work together for a worldwide reduction of interest rates and a scale of stimulus round the world equal to the depth of the recession and the dimensions of the recovery we must make,” Brown told Congress in Washington yesterday.

Economy Shrinking

The U.K. economy contracted 1.5 percent in the fourth quarter, the most since 1980, as consumers curtailed spending. Former central bank Deputy Governor John Gieve said Feb. 20 the nation faces a “serious risk” of a decade-long depression as the credit squeeze hampers growth.

“The Committee judged that this reduction in Bank Rate would by itself still leave a substantial risk of undershooting the 2 percent CPI inflation target in the medium term,” the bank said in a statement. “Accordingly, the Committee also resolved to undertake further monetary actions, with the aim of boosting the supply of money and credit and thus raising the rate of growth of nominal spending to a level consistent with meeting the inflation target in the medium term.”

Economy Shrinks

Manufacturers and service industries shrank for a 10th month in February, according to surveys by the Chartered Institute of Purchasing and Supply and Market research. Net consumer lending rose by 1.1 billion pounds on the month, the least since at least 1993, the central bank said March 2.

Michael Page International Plc, the U.K.’s second-largest recruitment company, said today that full-year profit dropped 4.3 percent as it was hurt by the global recession. IMI Plc, the world’s biggest maker of pneumatic controls, said yesterday it has cut its global workforce by 10 percent and plans further reductions in coming weeks to weather falling demand.

Central bank forecasts published last month show economic growth will resume in the second quarter of next year while inflation will slow to 0.3 percent in early 2011, below the bank’s 2 percent goal.

“The bank’s forecasts on the speed of the recovery seem to be extremely optimistic,” said Jonathan Loynes, an economist at Capital Economics Ltd. in London. “It’s going to be some time before growth returns.”