Bank of England begins creating new money

The bank will buy £2 billion of government bonds from financial institutions as it attempts to pull the economy out of recession.

March 12, 2009 08:39


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The Bank of England began creating new money on Wednesday, buying £2 billion of government bonds from financial institutions as it attempts to pull the economy out of recession and ward off deflation. The auction is the first tranche in the central bank's so-called "quantitative easing" program, which opens a new front in its fight against the downturn after policy makers almost ran out of room to lower interest rates further. Early signs were encouraging - investors offered to sell £10.5b. of gilts - five times more than the £2b. the Bank of England wanted to buy. The bank has committed to a £75b. asset-buying program, the first time that modern Britain has resorted to the measure, after a series of interest-rate cuts in recent months that have brought them to a record low of 0.5 percent. Colloquially known as "printing money," quantitative easing means the bank will in fact buy assets, such as government securities and corporate bonds, over three months and pay for them by crediting banks' reserve accounts - effectively creating new money.

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