Monday, January 19, 2009

UK Treasury gives go-ahead to 'print money'

By Chris Giles and George Parker in the Financial Times:

Britain took a step towards unleashing unconventional weapons to tackle the recession yesterday when the Treasury gave the Bank of England the power to create money and buy assets direct from companies and banks, write Chris Giles and George Parker .

As part of the sweeping banking announcements, the Treasury said the Bank would set up a new facility allowing it to buy up to £50bn of high- quality corporate assets that could also be used to boost the supply of money, "should the monetary policy committee conclude that this would be a useful additional tool for meeting the inflation target".

The MPC, which recently set interest rates at a historic low of just 1.5 per cent, has been considering such a move to boost demand. But, because the policy can be described as "printing money" and belongs to the same economic toolkit as the policies that caused hyperinflation in Weimar Germany and Robert Mugabe's Zimbabwe, officials in the Bank and Treasury are extremely cautious about public reaction to the plan.

George Osborne, shadow chancellor, sought to capitalise on this discomfort yesterday, calling the policy "the last resort for governments that have run out of other options".

Government insiders say all central banks can "print money" but do so under controlled circumstances.

Bank officials meanwhile said today's statement was just a clarification of powers the MPC already had.

The US Federal Reserve, which has lowered rates to virtually zero to combat the downturn, has already gone down the path of so-called quantitative easing - creating money at the stroke of a computer key to buy large quantities of assets - in an attempt to drive down interest rates in many markets across the economy.

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