When the Bank of England decided to expand its quantitative easing policy by 25 billion pounds to 200 billion on Thursday, it was essentially hedging its bets.

After Britain's economy shrank unexpectedly in the third quarter, and with two thirds of the City expecting an expansion to the QE programme, simply shutting off the tap of government bond purchases would risk being more of a shock than the economy could bear.

On the other hand, the Bank clearly believes that the worst is over for the economy and that recovery will come soon -- even if it's going to be weak.

Thursday's decision means the central bank will keep buying government debt until February, but at only half the pace of before. This still amounts to around 2 billion pounds a week, not including the much smaller sums of corporate debt that the Bank is buying.

What the decision means for a typical household is harder to calculate. The Bank says that its quantitative easing programme has raised the price of government and corporate
bonds, making borrowing cheaper.

But for average firms and consumers looking for a loan, the benefit is harder to spot.

There is little clear evidence that banks are much more willing to lend than a few months ago -- though the Bank would argue that quantitative easing has been instrumental in avoiding the recession turning into a depression.

In the longer term, the big unknown is the impact that quantitative easing will have on inflation. Sterling's weakness against the dollar and the euro will push inflation up in the short term, and going forward the Bank of England said it faced a balancing act.

While rising unemployment and half-full shops and factories will keep a lid on prices, policymakers know that quantitative easing could exert upward pressure on demand and prices for months if not years after it has stopped.

That's why they took the decision today which could mark the gradual phasing out of this unprecedented policy of asset purchases.

Britain's recession, like the downturns in most other places, is being hailed as either having reachえｄ bottom or tailed off in its decline. The latest to trumpet the beginning of the end is the British Chambers of Commerce, which said business orders and sales had continued to fall in the second quarter but at a slower pace than previously.

So does this mean that the Bank of England will soon start raising interest rates from the negligible 0.5 percent reached last year as policymakers sought to pump liquidity into a failing economy? Not according to researchers Capital Economics, which argues in a new report that market assumptions of higher rates at an early stage are misplaced. They offer three reasons:

-- A return to strong levels of activity and rapid price gains in the housing market is unlikely for some time, even at very low interest rates. Meanwhile, the overall economy is likely to expand at only sluggish rates in the foreseeable future. And even if the recovery continues to gather pace, the large amount of spare capacity - or slack - in the economy suggests that there should be no hurry to tighten policy at all.

-- Even when monetary policy is finally tightened, some part of this will involve the reversal of the Bank of England’s quantitative easing programme. Although the likely order of events is far from clear, this could delay the need for a conventional tightening in the form of higher interest rates.

-- Thirdly, there is good chance that monetary policy in general takes a back seat to a substantial tightening of fiscal policy as the government responds to the growing pressure to sort out the public finances. This is likely to take the form both of higher taxes and a severe squeeze on public spending and would require monetary policy to be kept correspondingly loose to prevent the economy from slipping back into recession.

So, essentially, the BoE will not be able to raise rates because a) the economy is a long way from good b) it has other things to unwind first and c) life is going to be so miserable for Britons that low interest rates will be their only salvation.

This latter point is beginning to excerise a lot of thought in Britain, with the head of the Audit Commission criticising politicans for failing to be honest about the need for cutbacks, given a forecasted £175 billion public deficit this year -- more than 12 percent ofgross domestic product.

"People had better understand this is an unprecedented situation. We have never seen anything like this in your lifetime or mine," Former prime Minister John Major, who knows quite a bit about crises, told TV presenter Andrew Marr.

(Reuters photos: Eddie Keogh and Darren Staples)

It says something about the current world that a new economic indicator is about to be unleashed by the Bank of England and it basically tells you whether banks have been doing what they are supposed to do -- lend.

The first Trends in Lending report is due out on April 21 at 0830 GMT. Always nice to have a new indicator, but this one may get a bit more attention than would have been the case a few years ago. It is designed to provide up-to-date information about bank lending to households and businesses.

Consumer groups, regulators trade bodies, the BoE, the UK government and lenders themselves will draw up the report under the rubric of something called The Lending Panel -- which a cruel cycnic might say sounds a bit like a high-interest loan shop.

Clearly, the purpose of the report is to show whether banks have been passing on the ultra-low interest rates that the BoE has been handing out.  What do you think it will show?

Abolish money. Punish the  looters. Eat the bankers.

Ageing 1960s hippies and their youthful anti-globalisation descendants joined in an angry  anti-capitalist protest at the Bank of England on Wednesday, waving placards and shouting slogans reflecting  a common fury at perceived corporate greed.

With worldwide recession destroying jobs by the week, protesters at the G20 protest in the City of London demanded an end to what they see as a global, predatory system that robs the poor to benefit the privileged.

“Welcome to Pig City: One war — class war” was the placard held up by a masked man standing on the doorstep of the central bank.

As hooded protesters scrawled “Peace and Love” on the walls of the Bank, Drogo, an elderly man in flowing multi-coloured robes and carrying an orb on a wooden stick, pointed at staff peering out of the Bank of England’s windows and said:

 ”I am here to tell these fat bankers to get off their arses and save the planet.

“They have to do it because they are still in charge – for now. But of course capitalism has to go down. We have had enough.”

One man strolled along Threadneedle Street dressed as a white-faced corpse in top hat and tails with a placard round his neck that read: “Their greed is killing our planet.”

Some windows were smashed. Protesters hurled paint bombs and empty bottles and occasionally threw punches at police, who responded with baton blows. 

Police said they had deployed one of Britain’s biggest security operations to protect businesses, the Bank of England, the London Stock Exchange and other financial institutions.

But the clashes were almost desultory, if briefly dramatic. There was no general looting.

This was not Seattle, 1999, when demonstrators successfully disrupted a World Trade Organisation meeting, or London’s anti-Iraq war demonstration of 2003, when hundreds of thousands joined together in an impressively unified march for peace.

The G20 meeting was due to take place several miles away in the Docklands area of east London on Thursday.

On Wednesday, there were just 4,000 demonstrators, and the range of causes they espoused was  varied in the extreme, bringing together anti-capitalists, environmentalists, anti-war campaigners and conspiracy theorists of various stripes.

For much of the day the mood was carnival-like. The police managed to seal off the handful of streets around the Bank from the rest of the City, where workers went about their business normally.

A brass band played for several hours. And as the day wore on, protesters peeled away from the knots of angry young men taunting riot police to dance to a mobile disco set up on the steps of the Bank.

Above the disco, someone had fixed a large poster which read: “Hundreds of Architects and Engineers Demand a Real 9/11 Investigation.”

The hard core of violence-prone protesters were a tiny minority. Some masked and hooded young men belied their mysterious appearance by being friendly and talkative.

One, 19-year-old student Francis, explained: “Bankers have made bad gambles and we are all paying for it. They must take responsibility for that.”

There was even a good-natured counter-demonstration by pro-capitalists. One of them, Simon Richards, 50, from Gloucester, western England, said: “We have come to stage a counter-demonstration to show we are not intimidated by the terror tactics of these  protesters.

“We are in favour of free market rather than state control.”

Protester Mia, 21, a student from Denmark, waving an anti-war banner, said the range of causes on offer was a  strength, not a weakness.

She said she wasn’t just angry about international conflict.

“We’re here to protest about all of it. All these crises are linked,” she said.

“The U.S. has to borrow lots of money from China and other places to pay for all these wars, meaning they have less money for housing and other parts of their economy. It’s vital to demonstrate about it, provided it’s peaceful.”

 Here are a selection of placards and graffiti seen at the demonstration.

 ”Capitalism isn’t working”

“Drop books, not bombs”

“Banks are evil”

“People will stop robbing banks when banks stop robbing people”

“Make love, not leverage”

“Resistance is fertile”

“Housing is a right, not a privilege”

“You can rent the house you used to own”

“Eat the bankers”

“Banker, rhymes with ?”

Gordon Brown has not said openly that he plans to turn on the taps again in the budget with another package of spending and tax cuts, but his appeals to world leaders to do just that have led to a widespread feeling that more stimulus is to come.

So Mervyn King’s warning against more spending when debt levels are already so high has predictably been leapt upon by the Conservatives as a powerful message of support for their own position. 

Do you believe the way to beat the recession is to stimulate the economy with more spending, as Brown wants, or with  a more cautious, steady-as-she-goes approach as favoured by the Conservatives?

And should the Bank of England governor be straying so far into political territory?

Britain could begin a telling exercise in classical monetary theory on Thursday as the central bank gets set to test a newly minted policy of “quantitative easing”.

In an effort to pump more money into the financial system and encourage banks to get lending again, the Bank of England has been given the green light to basically create more money.

 It will use the electronic funds to buy short- and long-dated gilts and a host of commercial debt in the hope that that will free up other capital to the banks, allowing them to lend more.

At root, the exercise is based on MV=PT, known as the Fisher equation of exchange and a mainstay of Keynesian monetary theory.

In the equation, M is the quantity of money and V is the velocity at which it travels around the economy. P stands for the general level of prices and T equals the number of transactions performed over a given accounting period.

In theory, V and T are more or less stable, meaning that all other things being equal, the amount of money in circulation has a direct impact on prices and/or the number of transactions.

By pumping more M into the economy (or at least making more M available), the central bank is hoping that economic activity will pick up (T will increase) and the economy will be reflated (P will pick up). In theory.

The problem will come if those who have more money made available to them — the banks, commercial borrowers, companies and ultimately individuals — end up sitting on it rather than using it. That would effectively mean that V falls.

That has always been the unquantifiable in monetary theory as precisely measuring the velocity of money is extremely difficult, not to say open to interpretation.

If it works, quantitative easing will push up M, P and T and a corner may be turned in the credit crisis. Maybe. If it doesn’t, then M may go up, but V, T and P will all go on falling, causing More Very Tricky Problems indeed.

The Bank of England’s decision to cut interest rates to a record low of 1.0 percent may have been widely predicted, but this did little to hold back the avalanche of commentary that began the moment the news came through at noon today.

Interest rates, which have now been cut five months in a row, are at the lowest level in the Bank’s 315-year history, and the list of people calling yet another easing pointless appeared to be getting longer.

Economist Ros Altman, writing on www.theguardian.co.uk, said: “This is another policy mistake. More panic cuts are not the answer to our economic crisis. Policymakers are desperately trying to boost the flagging economy and encourage more spending… but lower rates are a very crude weapon. They punish those who have got money to spend while benefiting the very groups (banks in particular) whose actions caused the mess in the first place.”

She wasn’t alone. BBC blogger Stephanie Flanders wrote: “It is hurting. But so far it isn’t working… Savers say they are being punished for nothing - rate cuts are hitting their income, while having less and less impact on the economy at large. They have a point.”

Meanwhile, Melanie Bien, of mortgage brokers Savills Private Finance, was quoted in several publications as saying: “Today’s cut was expected by the markets. It will assist those on base-rate trackers with no collars or standard variable rates if those lenders pass on any of the cut. But beyond that it will have little effect.”

The Sun didn’t hold back either, calling the rate cut a “desperate attempt to revive the flagging housing market” while The Daily Mail website said the MPC was “going for broke”.

Proponents of the drop were harder to find, but not non-existent. Ashley Seager, writing for The Guardian, said: “The argument doing the rounds that the Bank should have left interest rates at 1.5% while carrying out quantitative easing is nonsense. While it is true that the real problem has become the quantity, rather than the price, of credit, the idea that cutting rates makes no difference is simply not true.

“With around 40% of homeowners on tracker mortgages, the impact on many households’ families is immediate, and will reduce the burden on those homeowners unfortunate enough to have lost their jobs.”

Ian McCafferty, chief economic adviser to the Confederation of British Industry, was quoted as a supporter of the cut. “This drop in rates should support business confidence and, when added to recent cuts of the past couple of months and the fall in the pound, provides a very significant stimulus to the ailing economy.”

There was however a general consensus that rate cuts alone are not the answer to the economic crisis and that the Bank of England should do more to get banks lending again.

Have your say on the rate cut by posting a comment here.

The Bank of England has gone into further into uncharted territory with its decision to cut rates by half a point to just one percent. Many economists think they will be down to zero by the Spring.

But like gunfighter running out of bullets, the Bank is, in the view of some observers, just wasting ammunition by using the interest rate weapon.

The problem lies, they say, in the availability of credit, not the price of it. What use is a nice cheap loan on a house if a bank is demanding a whopping 25 percent deposit?

Do you think the Bank of England could do more to stimulate confidence and get credit flowing again — and if so, what could the central bank or the government do?

An old Chinese proverb states that it is better to take many small steps in the right direction than make a giant leap and fall back. Judging by the number of bank lending initiatives announced over the past three months, British policymakers are taking this to heart.

On Monday, Britain announced no fewer than eight measures to kickstart lending in its credit-starved economy. Despite pouring 37 billion pounds of public money into major banks last October and pledging hundreds of billions more in guarantees, the government had to admit it needed to take more credit risk off banks' books.

Monday's package is designed to be comprehensive.  It includes -- amongst other things -- a fund to allow the Bank of England to lend directly to businesses, a framework for boosting the money supply if needed, a guarantee scheme for asset-backed securities and the offer of insurance against potentially explosive losses.

None is a silver bullet and the devil will be in the detail. Much of the nitty-gritty of how these measures will work is still not known. 

 It is also likely to be a slow process. The Bank of England's 50 billion pound asset-buying pot is one of the few measures to take effect immediately.  Analysts at BNP Paribas calculate this equates to just 2 percent of bank lending in Britain compared to a ten percentage point drop in lending in the last year.

One opposition politician, Vince Cable, likened attempts to kickstart bank lending in Britain to "giving a kiss of life to a corpse." Colourful. But a revival in bank lending is indeed by no means assured. More steps may yet be needed.

Interest rates have been cut again - to a record low of 1.5 percent. As they get ever closer to zero, the impact of rate cuts will become more and more limited. So what can central banks do to ease the economic pain?

“Quantitative easing”, or what non-economists call “turning on the printing press” is one of the options.

Here is our guide to how it works and which countries have used it:

WHAT IS QUANTITATIVE EASING?
– Quantitative easing refers to ways of boosting economic growth after traditional monetary policy tools, such as interest rate targets, have been exhausted.
– Central banks flood the banking system with masses of money, more than is needed to keep official interest rates at zero or a low rate, to shore up financial systems and promote lending. They usually do this by buying up large quantities of assets from banks.

WHO HAS USED IT?
* JAPAN:
– The BOJ adopted quantitative easing, going beyond keeping interest rates at zero, in March 2001 after the economy was hit by the bursting dot-com bubble and remained stuck in a battle with deflation.
– Many experts, including some BOJ policymakers, were sceptical whether the policy had any direct effect in reviving the economy, but most agreed it helped limit deflation and avert a more serious banking crisis.
– The extra fund cushion meant banks, burdened with massive nonperforming loans, avoided a liquidity crunch and were able to take bolder steps in cleaning up their loan portfolios.
– Instead of a traditional policy of raising or cutting short-term rates, the BOJ set a target for the amount of money it force-fed into the banking system. The funds were injected mainly through the BOJ’s purchases of government and commercial securities from banks. The policy ended in 2006.

WHO IS USING IT?
* THE FED:
– Economists agree the U.S. Federal Reserve has adopted a form of quantitative easing in its efforts to stabilise the financial system and help the economy, though in a different way from what the BOJ conducted.
– The Fed cut the benchmark federal funds rate target to a range of zero to 0.25 percent, saying it would help markets and stimulate the economy by keeping its balance sheet at a high level.
– The Fed has committed to purchasing large amounts of mortgage-related debt to help the housing market, and it is considering outright purchases of government bonds.
– Since the bankruptcy of Lehman Brothers in September, the Fed’s array of measures to shore up the financial sector has already caused its balance sheet to more than double in size to a record level above $2 trillion.
– The Fed said that its dramatic policy action last week did not signal increased concern about deflation but a determination to improve lending conditions by lowering mortgage rates and other important financial rates.

WHO MAY USE IT?
* BOE:
– Bank of England policymaker David Blanchflower said last month that monetary policymakers would be right to consider using extraordinary measures, including quantitative easing, to boost the economy and prevent a deflationary spiral.

* BOJ:
– If the global recession deepens, the BOJ may return to quantitative easing early next year. Naoki Iizuka, senior economist at Mizuho Securities, said the BOJ could resort to cutting Japanese rates to zero as early as January to contain the slump. Some analysts see the central bank going even further by reverting to quantitative easing.
– Using this policy could be hard to swallow for BOJ Governor Masaaki Shirakawa who, as a central bank bureaucrat, was involved in crafting the policy and has warned that keeping rates too low would distort money market functions.
– Senior BOJ officials have said the bank was not ruling out any policy options as the economy, already in recession, faces the risk of suffering its longest contraction on record.
– Shirakawa told parliament last month quantitative easing had a certain effect in stabilising the financial system, adding that he was examining the effects and side-effects of the policy.
– Like the Fed, the BOJ is trying to target troubled markets that are affecting the economy, such as the commercial paper market in which companies raise short-term financing. The BOJ said last week it would buy commercial paper outright and would boost the amount of its monthly government bond purchases.

(Guide compiled by David Cutler and Jijo Jacob)