March 3, 2009 / 1:32 AM / 10 years ago

Bank may use quantitative easing this week

LONDON (Reuters) - The Bank of England could this week start buying assets with newly created money to boost the money supply and the economy, Chancellor Alistair Darling said in an interview on Tuesday.

Chancellor Alistair Darling leaves 10 Downing Street following the weekly cabinet meeting in London January 27, 2009. REUTERS/Toby Melville

Darling told the Daily Telegraph newspaper he also expected more banks to take advantage of the government’s Asset Protection Scheme, which insures against losses arising from toxic assets.

The Bank’s Monetary Policy Committee convenes for its monthly interest rate meeting this week, with analysts expecting a further cut in borrowing costs from the current record low of one percent and then, the first tranche of quantitative easing.

“We’ve given them the levers,” Darling said. “They may decide this month that it’s appropriate to do so.”

An exchange of letters between Darling and Bank Governor Mervyn King is expected in the next few days setting out the parameters for any quantitative easing programme. The Bank is due to announce its policy decision at 12:00 p.m. on Thursday.

Boosting the money supply is regarded by policymakers as the next logical step when interest rates cannot fall any lower or when rate cuts become less effective.

The Monetary Policy Committee believes more monetary easing is probably needed to stimulate the ailing economy and King has said the supply of money is not growing quickly enough.

The economy shrank 1.5 percent in the three months to December, the sharpest drop since 1980, and is expected to contract for much of this year, raising pressure on both the central bank and the government to take more supportive action.

Darling said it was “crucial that countries act collectively” to stem the economic fallout from the credit crunch, echoing Prime Minister Gordon Brown’s call for more measures to support economies and lending around the globe.

“We can see the solutions,” Darling said. “It’s getting other countries to go the extra mile. Otherwise the problems will be enormously damaging for a long time to come.”

The Treasury is currently working with Lloyds Banking Group to ascertain what proportion of its risky assets can be brought under the government’s insurance scheme and at what price.

Royal Bank of Scotland said last week it would place assets worth 325 billion pounds into the scheme.

“I expect more people will approach us,” Darling said. “It makes sense. If you don’t end uncertainty, more banks will put up their shutters, and it will be a disaster, not just for them but for all of us.”

Reporting by Matt Falloon; Editing by Gary Hill

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