Bank of England Gains Power to Buy Assets as New Policy Tool

By Brian Swint and Svenja O’Donnell

Jan. 19 (Bloomberg) -- The Bank of England won authorization from the government to buy assets and expand its policy toolkit to fight the risk of deflation as interest rates approach zero.

The central bank can make initial asset purchases of up to 50 billion pounds ($74 billion), the U.K. Treasury said in a statement today. The government will indemnify the purchases against any losses in the facility, which will start on Feb. 2.

The asset program “provides a framework for the Monetary Policy Committee of the Bank of England to use asset purchases for monetary policy purposes should the MPC conclude that this would be a useful additional tool for meeting the inflation target,” the Treasury statement said.

The Bank of England this month lowered the benchmark interest rate to 1.5 percent, the lowest since the bank’s creation in 1694, as Britain faces its first recession since 1991. Today’s announcement means that the central bank may engage in so-called quantitative easing if lower interest rates fail to stimulate the economy.

“This obviously marks a radical change in the U.K.’s monetary policy framework,” said Ross Walker, an economist at Royal Bank of Scotland Group Plc in London. “With bank rate approaching the zero bound, but the wider economy suffering a more severe deterioration, the MPC is being forced into unorthodox policy territory.”

Financial Crisis

Prime Minister Gordon Brown has given authority to the bank to start purchasing assets as part of a broader plan to revive lending as banks recoil in the global financial crisis. The government will also guarantee bank loans and offer capital and asset protection.

“The asset purchase facility will provide an important additional tool to improve financing conditions in the economy,” Bank of England Governor Mervyn King said in an e- mailed statement.

The central bank’s Special Liquidity Scheme will expire at the end of the month as previously planned, the Treasury said.

The bank will also extend the maturity of its discount window to one year from 30 days to help banks access liquidity. The fee for using the lending facility beyond the usual 30 days will be an additional quarter-point, the central bank said in a separate statement.

The central bank said it will publish another announcement with details on the discount facility before it starts.

To contact the reporters on this story: Brian Swint in London at bswint@bloomberg.net; Svenja O’Donnell in London at o sodonnell@bloomberg.net.