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Britain on Wednesday officially launched quantitative easing - effectively printing money - to pull the economy out of recession, and bought 2 billion pounds of government bonds in a move that may soon be copied around the world.
The central banks initial offer - the first part of a 75 billion pound asset-buying programme - to non-bank institutions like pension funds earlier on Wednesday met with no takers but it was able to fulfil its buying quota of 2 billion pounds from banks in a second so-called reverse auction.
Banks had offered to sell 10.5 billion pounds of gilts. "It went well, they got over 10 billion pounds in bids so thats a cover of 5.25," said Jason Simpson of RBS. Central banks around the world will be eager to see how successful the BoEs efforts are in bringing down market interest rates, boosting demand and encouraging banks to lend.
Quantitative easing, or boosting the money supply, had only really been practised in Japan before in the early part of this decade as part of the countrys long battle against deflation, but met with limited success.
The Wall Street Journal reported that the Federal Reserve had been struck by the early apparent success of the BoEs quantitative easing plans - 10-year gilt yields have fallen to record lows since it announced the purchases last week - and the US central bank could move towards a similar effort. But as gilt yields have plummeted, corporate bond spreads have widened, leading some analysts to question whether the BoE should be paying more attention to bringing down the cost of corporate borrowing.
Policymakers have been forced to consider unconventional policy action to stave off a global economic slump because official interest rates are nearing zero and there is some doubt over how effective further rate cuts would be. The BoE has already cut rates to a record low of 0.5 percent in response to a sharp downturn. Britains economy shrank at its sharpest pace since 1980 in the three months to December.
The central bank hopes that by buying up bonds, making yields fall sharply, it will make it cheaper for companies to borrow on the capital markets. Institutions that have sold gilts to the BoE, meanwhile, will have extra money to lend. Strategists said earlier they were not surprised that non-banks had not been ready to sell gilts to the BoE given the complexity of the process. "I dont think you can read a huge amount into it. The participants are still getting used to the new system," said Sean Maloney, fixed income strategist at Nomura.

Copyright Reuters, 2009

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