Bank may need to make more money

Jan 22 2009 By The Journal

THE Bank of England could soon be "creating" money to boost the economy despite the threat of inflation and international confidence in Britain suffering.

Newcastle Central MP Jim Cousins, a member of the influential Commons Treasury committee, expects the bank will create reserves to buy financial bonds to inject cash into the UK economy within months.

He predicted the Bank of England would take such action from around April as its traditional method of stimulating the economy by cutting interest rates became ineffective, but added the measure should be introduced as soon as possible.

Incoming Bank of England deputy governor Paul Tucker also yesterday told MPs that new funds held by the bank may be "created" if interest rates fell to zero – as seems possible – to bolster the economy.

But the move may spark fears of rising inflation as more cash feeds into the system and affects the country’s international credibility if seen as a desperate gamble.

And that could make borrowing more difficult and expensive, despite it being central to Gordon Brown’s economic rescue package – which in turn could push up taxes and mortgage bills.

Public borrowing is already soaring and likely to climb with bank bailouts costing hundreds of billions of pounds.

The total for April to December stood at £71.2bn, leading economists to question if ministers will meet their target for the financial year of £78bn.

But Downing Street insisted Britain was in good financial health and rejected any suggestion that a contingency plan was being drawn up in case the country defaulted on its debt.

And Mr Cousins backed radical action by the Bank of England, saying: "They will be creating new reserves, but I think it is perfectly reasonable to expect that in the long-term the value of the things they are buying will ultimately be increased and it will balance out.

"There is a credibility risk and there is ahead of us an inflation risk but these two risks in my view are not nearly as great as continuing to allow the economy to run down."

His comments came before Bank of England Governor Mervyn King said the ability to buy-up private sector assets could be a useful additional tool in battling deflation for the bank’s monetary policy committee.

"With the bank rate already at its lowest level in the bank’s history, it is sensible for the MPC to prepare for the possibility – and I stress that we are not there yet – that it may need to move beyond the conventional instrument of bank rate and consider a range of unconventional measures," said Mr King.