Bank prepares to embark on quantitative easing

LONDON (Reuters) - Bank of England policymakers could decide as early as this week to boost the money supply to support the economy as conventional monetary policy tools lose their edge.

Commercial banks have clamped down on lending to households and businesses even though central banks around the world have slashed borrowing costs, and the Bank has highlighted a lack of credit as the biggest threat to an economic recovery in Britain.

The Bank has cut interest rates by 4 percentage points since last October to a record low of 1.0 percent. It is widely expected to trim rates by another half percentage point on Thursday to 0.5 percent.

The central bank already buys commercial paper under its Asset Purchase Facility. However, the scheme does not constitute quantitative easing as it is financed by the issuance of Treasury bills.

Following is a schedule of the steps the central bank must follow before it can embark on quantitative easing.

* The nine-member Monetary Policy Committee voted unanimously at its February meeting to ask Chancellor Alistair Darling for permission to embark on a process of quantitative easing -- raising the supply of money in the economy by buying government bonds or corporate assets.

* Bank Governor Mervyn King has already asked Darling for permission to start boosting the money supply.

Darling is expected to reply to King's request in a letter this week, in which he will set a limit on the amount of money the Bank may create to buy up gilts or commercial assets.

The exchange of letters between the two men is expected to be published later in the week.

* The Monetary Policy Committee would decide which assets to purchase, thereby maintaining its independence from government in setting monetary policy.

(Reporting by Fiona Shaikh; editing by David Stamp)