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MPC Meeting Minutes -18th March 2009

UK fundamental news today on the economic calendar concerns the MPC minutes, released at 9.30 UK time. At its meeting earlier in the month, not only did the MPC slice a further 50 basis points off the Bank Rate paid on commercial banks’ reserves (taking it to yet another record
low of 0.50%), but it also unveiled an initial £75bn programme of asset purchases to be financed by the issuance of new central bank money. The MPC has resorted to such “unconventional measures” (known as quantitative easing) because it believes that with interest rates already close to zero inflation is still likely to be significantly beneath the government’s 2% target in two years’ time. As a result, the Committee is now seeking to stimulate the economy by directly increasing the quantity of money in circulation. To do this, the Bank of England plans to buy a combination of private sector assets and medium-to-long dated conventional gilts over the next three months. Faced with increased reserves earning just 0.5%, the hope is that the commercial banks will respond by stepping up lending to the private sector (non-financial
companies and households) in order to bring their reserves back down to desired levels. Meanwhile, with increased money balances in their bank accounts, spending by private sector companies and individuals should strengthen. The consensus expects the minutes to reveal that both decisions – the rate cut and the £75bn first tranche of QE – to have been taken unanimously.

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