Bank of England's interest rate cut was unanimous, reveals minutes

Mar 19 2009 by Alun Thorne, Birmingham Post

The Bank of England’s interest-setting committee devoted much of its meeting early this month to debating the scale, speed and nature of the Bank’s planned injection of newly-created money into the economy to counter the recession.

The decision to cut the Bank’s official interest rate by another half-point to an all-time low of 0.5 per cent was treated as a secondary issue, to judge from minutes of the meeting published yesterday.

Some committee members did warn that the pressure on banks’ profit margins from ultra-low rates might squeeze their lending capacity.

They also saw problems in money markets when the cost of borrowing had eventually to be raised after a sustained period of very low interest rates.

In the event, though, the cut was agreed unanimously. So was a decision to deploy at the outset £75 billion of the £150 billion approved by Chancellor Alistair Darling for “quantitative easing”.

The monetary policy committee thought that too small a sum used early on to buy Government bonds and other financial assets might prove ineffective.

“The initial programme of asset purchases needed to be on a scale large enough to demonstrate that the committee would do whatever was needed to boost nominal spending sufficiently to keep inflation at (the two per cent) target in the medium term,” the minutes recorded.

“If the purchases proved too expansionary, the Bank would be able to reduce the degree of stimulus, either by selling back some of the assets, or by raising the level of Bank rate.”

Although the official measure of inflation is still running at three per cent, the Banks expects it to fall below the target shortly and to remain there for some time.

It emerged yesterday that the absence of generous year-end bonuses – not all of them in the City – caused average earnings to fall by 0.2 per cent year on year in January, the first such fall since records were first kept in this form in 1991.

Taking the private sector alone, the drop was 1.1 per cent. Not counting bonuses, regular pay across the whole economy rose by 3.4 per cent over the 12 months.

Although the committee accepted that most of the newly-created money should be used to buy Government bonds, this was because the quantity of sterling corporate bonds is limited.

Recent reports have suggested that much of the money has been leaking overseas, doing nothing to boost the British economy, because foreign banks were the sellers of many of the gilts it bought.

“The committee noted that these asset purchases were likely to be most effective if they were purchased from the domestic non-bank financial sector rather than from banks,” recorded the minutes. “Domestic non-bank institutions were likely to use some of the proceeds from asset sales to buy other assets”, so that the money would feed through into the economy, raising the prices of the securities they bought, so generating wealth.