Bank pumping £75bn into economy

Some £75 billion of newly-created money is being pumped into the struggling economy by the Bank of England.

The move has been decided by the bank's Monetary Policy Committee (MPC) and aims to boost the money supply and encourage lending by effectively printing new money.

Interest rates have been slashed to a record low of 0.5%, but the MPC thinks that more needs to be done to lift the UK out of recession. The committee can create up to £150 billion in new money if necessary.

Under the first part of the project, known as quantitative easing (QE), the bank will buy up Government gilts through twice-weekly auctions.

The bank has £75 billion to spend over three months and will be buying around £5 billion a week on average.

This new money will then be placed in accounts with UK banks, boosting the banks' deposit bases and - hopefully - allowing them to go out and lend more in the wider economy.

The Bank will buy up the bonds through its Asset Purchase Facility, which has also been buying up commercial paper - effectively corporate IOUs - financed so far by the sale of Treasury bills.

This process of buying up private sector debt will go on, but the purchases will instead be financed by central bank money.

But according to economists, the success of QE will depend on the extent to which banks lend the newly-created money.

Jonathan Loynes of Capital Economics said: "In theory, the "multiplier" effects are potentially very powerful and could turn the initial £75 billion of asset purchases into a sharp rise in nominal GDP.

"But these effects are likely to be very muted in the current economic environment, as banks decide to hoard a proportion of the rise in their reserves and firms and households sit on cash rather than spend it. If so, the impact of the policy could be almost negligible."