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Bank Begins Using New Money

Fri, 13 Mar 2009

The Bank of England has begun using the money it effectively created through quantitative easing. Of the £75 billion it created, the central bank has bought £2 billion of government bonds from financial institutions and funds. The move is designed to inject funds into the wider economy to kickstart lending. The Bank of England has government permission to inject a further £75bn into the economy if it wishes, after a series of interest rate cuts .

The £2 billion worth of bonds, known as gilts, was bought in a reverse auction. The Bank was offered an estimated £10.5 billion by commercial banks, indicating the desire of the banks to sell their debt on. Similar auctions are set to take place twice weekly.

There were, however, no bidders for the non-competitive portion of the auction, where bidders commit to selling debt to the Bank without setting a price. Analysts attributed this to the unprecedented nature of the auction, with banks unwilling to commit themselves until they have seen whether the competitive portion of the auction was successful.

The prices of long-term government bonds, or gilts, have risen by 20 per cent over the last few days, prompting yields on the benchmark 10 year bond dropping to a record low.
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