CNBC Bank of Engand Cuts Rates, to Buy Govt Bonds

The Bank of England cut interest rates by 50 basis points on Thursday to a record low of 0.5 percent, and said it would buy 75 billion pounds of assets to expand the money supply and aid a recession-hit British economy.

Unveiling the asset purchase program -- the start of "quantitative easing" measures employed when rates get near to their minimum -- the Bank said the likely majority of purchases over the next three months would be of gilts (UK government bonds) at medium and long maturities.

Gilts soared on the announcement, with the June future rallying more than 2.50 full points, while sterling fell against the dollar. The latest rate reduction means the BoE has now cut interest rates for six months running by a total of 4.5 percentage points as Britain struggles with its first recession since the early 1990s.

The government has given the BoE permission to buy as much as 150 billion pounds' worth of assets with newly-created money. This figure also includes 50 billion pounds set aside in the government's asset purchase facility that hitherto would have been funded by the issue of Treasury bills. The total of 150 billion pounds was at the top end of what analysts had been expecting.

The Bank said it would monitor the effectiveness of the asset buying program at its future meetings. Such a policy was pursued by Japan at the start of the decade but is unprecedented in Britain and underlines the severity of the downturn caused by the global credit crisis. The policy is intended to encourage the banks to lend more freely to households and businesses, and in turn stimulate economic growth.

The latest reduction in interest rates would itself leave a substantial risk of inflation undershooting the two percent target in two-years' time. But the BoE added it was also concerned that a low level of interest rates could be counterproductive for some markets.

"It is in line with expectations. The decision to embark on an asset purchase of 75 billion is obviously the right move," said Amit Kara, UK economist at UBS. "We think it is a start and will probably end up double the size, probably over the course of the year."