$165b to fight credit crunch

LONDON - THE Bank of England said Thursday it will create US$106 billion (S$165 billion) via extraordinary measures to boost lending after cutting interest rates to a record-low 0.5 per cent.

In a bid to lift Britain out of recession, the BoE said it would create 75 billion pounds via so-called 'quantitative easing' measures. It plans to buy government bonds over the next three months from commercial banks, which would use the new money to ease the credit crunch.

British finance minister Alistair Darling has authorised the BoE's monetary policy committee (MPC) to create up to 150 billion pounds of new money, the central bank said.

'The 75 billion pounds that the MPC is going to use initially is a good starting point in its first attempt to pump money into the system,' said Ernst & Young analyst Hetal Mehta.

'No one knows how much money is required so the MPC's decision to use half of the authorised amount is sensible.' The Bank of England also on Thursday slashed British borrowing costs by half a percentage point to 0.5 per cent - the lowest level in the Bank of England's 315-year history.

The BoE's twin announcements came shortly before the European Central Bank lowered its main interest rate by half a percentage point to a record low 1.50 per cent as the eurozone also battles recession.

Quantitative easing refers to a central bank creating money as part of monetary policy to boost the money supply and prevent falling prices.

The MPC voted 'to undertake a programme of asset purchases of 75 billion pounds financed by the issuance of central bank reserves,' the BoE said in a statement on Thursday. 'Credit conditions faced by companies and households remain tight,' it added.

Faced with Britain's first recession in 18 years and falling inflation, the Bank of England also extended a series of sharp cuts since October, when interest rates stood at 5.0 per cent.

BoE Governor Mervyn King last month wrote to Chancellor of the Exchequer Darling, seeking permission for quantitative easing - a measure also being considered by the US Federal Reserve among others to get economies back on track.

With interest rates so low and having little traction, quantitative easing is seen as the next best option, modelled on the Japanese experience of the 1990s. The BoE recently warned that the British economy risked shrinking 4.0-6.0 percent later this year on a 12-month basis, before possibly returning to growth in 2010. -- AFP