Bank of England ‘prints’ £75bn, cuts rates to record low

In a move unlikely to surprise most, the Bank of England today voted to cut interest rates to 0.5% – the lowest base rate in the central bank’s history.

The drop reflects a 0.5% drop from February’s record-low interest rate of 1%.

As the interest rate teeters perilously close to 0%, the Bank also announced plans to begin quantitative easing – or ‘printing money’ – in order to help resuscitate an economy reeling from rising unemployment, a drop in housing prices, and the risk of deflation.

In order to stimulate the flow of money, the Bank’s Monetary Policy Committee pledged £75bn towards the purchasing of assets and government bonds in the hopes that banks will filter profits down to consumers in the form of affordable loans.

The MPC expects that asset and bond purchases may take up to 3 months to be completed, meaning that consumers are unlikely to benefit from any immediate effects.  In the meantime, further rate reductions are not expected, in part because there is little room left for additional cuts.

In a letter to Alistair Darling, Bank Governor Mervyn King explained the need for quantitative easing in the wake of further rates cuts;

‘[Quantitative easing] would act to boost the supply of broad money and credit and increase the liquidity of private sector portfolios, thereby raising nominal spending.’

Quantitative easing is a process by which the government pumps money into a lifeless market.  By purchasing government bonds, the government passes fresh money on to banks, who in turn are expected to offer more affordable loans to consumers.  The Bank of England hopes that £75bn worth of assets and bond purchases will help curb further drops in the rate of inflation and help the UK stave off a potentially devastating period of deflation.