Bank of England creates £2bn of 'new' money

LONDON (ShareCast) - The Bank (TBHS - news) of England has successfully pumped almost £2bn of extra money into the financial system in the
hope it will convince banks will lend more money.
A complicated 'reverse auction' process attracted offers from commercial banks to sell £10.5bn worth of gilts, or government bonds, to the central bank, of which a fraction under £2bn was accepted.
This means the Bank of England has effectively started the printing presses as part of its £75bn programme of 'quantitative easing' to boost the British economy.
The idea is that it gets new money into the system and into the banks, which it hopes will then increase lending to cash-strapped companies and individuals.
There was disappointment earlier as the first of today's two auctions, conducted at midday and aimed at institutional investors such as pension funds, failed to attract any interest.
It's though that many of them chose to pass instructions to their brokers who acted on their behalf at the second auction to banks this afternoon.
Bidders were only interested in the 'competitive' portion of the auction, held between 2.15pm and 2.45pm, which allowed banks to put a price on their gilts. There was no interest in the 'non-competitive' part that committed bidders to the Bank's own price.
Today's action comes less than a week after the Bank of England confirmed it would begin a £75bn programme of asset purchases and that it had permission from chancellor Alistair Darling for another £75bn if needed.
It's the first time the policy has been tried in the UK and some are calling it the last throw of the dice to save the country from an even deeper recession.
Interest rates have already been slashed to their lowest in the central bank's 315-year history, leaving little room for further stimulus from rate cuts alone. Borrowing costs fell another half point this month and are down from 5% last October.
Auctions will now take place every Monday and Wednesday, with results published on the Friday.
It could take up to three months to carry out the programme, according to a statement from the Bank released last Thursday.
But the move has angered some. Ros Altmann, an independent policy adviser, explains that the plan to get the institutions selling gilts to invest the money in UK company debt instead, "is not going to happen!"
"Institutions will switch to overseas debt or top quality bonds, but will not put much into smaller companies who desperately need the funds," he says.
"Whoever is advising the government on this simply does not understand how institutional investors operate."