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Can MV=PT solve credit crisis for BoE?

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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.

Rate cut round-up: “policy mistake” or “confidence boost”?

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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.

Are interest rates at one percent the answer?

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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.

from MacroScope:

A path strewn with difficulties

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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.

What other options does the Bank have?

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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.

How far will central banks go in 2009?

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The year 2008 has been filled with unprecedented events and all-time lows, a financial system overhaul and global turmoil. Could the New Year herald positive re-evaluation and a positive turnaround? And in what has been a year of sleepless nights for many, will a nation steeped in debt start to curb excess?

Rate cuts figured high on the news agenda as banks undertook radical measures to stabilise the economy. Within the space of one week, Britain saw the lowest base rate since the mid-1950s, the ECB took its rate to a two-and-a-half year low, the U.S. Federal Reserve aggressively slashed rates and a 175 point reduction was made by Sweden’s central bank.

The key question remains – will governments run out of weapons to boost the economy in 2009?

Was one point enough?

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The Bank of England has cut interest rates by a whole point to 2 percent in response to increasing worries over discouraging data and a looming recession.

This week, the all-important services sector (which makes up three quarters of economic output) recorded its weakest headline index since 1996 and seventh straight month of contraction. Together with dismal news on unemployment and inflation, these surveys confirm that recession is spiralling as we reach the close of 2008.

Pain not over yet after Bank of England rate cut

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This is a guest blog by Melanie Bien, director of independent mortgage broker Savills Private Finance. The opinions expressed are her own:

The Bank of England’s decision to cut rates by 1.5 percentage points to 3 per cent – the lowest level in 54 years – is a huge surprise and everyone was caught on the hop by this drastic reduction.

Should rates go even further down?

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Praise for the Bank of England’s huge cut in interest rates to 3 from 4.5 percent has been widespread.

Economists say it was a bold and aggressive move and the government will now be looking for banks to pass on the reductions in full.

No time to be boring for BoE’s King

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mervynking.jpgBank of England Governor Mervyn King has made his first public speech since the emergency bank recapitalisation programme and several newspapers commented on the change in demeanour of a man who once said his ambition as a central banker was to be boring.

The dramatic events over the past two months since the collapse of Lehman brothers have forced King into the spotlight — like it or not. Being boring is not an option now.

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