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King asks Darling to agree to £150bn asset purchase

Mervyn King, governor of the Bank of England, wants to buy £150bn in assets to boost inflation and restore lending.

In a letter to the chancellor Alistair Darling, King warns that rate cuts alone may not be enough to bring in inflation in line with the government’s 2% target.

King’s recommendation is to build on the Asset Purchase Facility announced by the government in January, which allowed the BoE to buy up to £50bn of high-quality private assets.

He has now asked the chancellor for permission to buy up to a maximum of £150bn of assets, with up to £50bn to be used to purchase private sector assets.

Gilt-edged securities would also qualify for the scheme under King’s proposals.

The speed and scale of assets to be purchased would be up to the Monetary Policy Committee to decide.

King’s letter reads: “In these highly uncertain times, there are merits to stimulating the economy through a variety of different channels.

“If the committee were to use the facility for monetary policy purposes, purchases of assets would be financed through central bank money, rather than by the issuance of Treasury bills.”

He adds: “This would provide scope for the monetary base to be expanded.

“It would act to boost the supply of broad money and credit and increase the liquidity of private sector portfolios, thereby raising nominal spending.”

The BoE governor says the central bank “remains committed” to restoring liquidity and proposes that any extension to the asset purchase scheme will not detract from the current buy-up of private sector assets.


More base rate cuts will achieve little

The recent announcement by Northern Rock that it intends to return more actively to the lending market is likely to be widely welcomed, particularly by the broker community where it has historically distributed the majority of its funds.


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