-BOE King: Case for further monetary easing is growing
-King: BOE, Treasury creating temporary bank funding scheme
-King: Activating BOE extended collateral term repo facility
-King: BOE to start auctions of six month sterling liquidity

LONDON (MNI) – Bank of England Governor Mervyn King signals
his support for further quantitative easing and unveils a joint BOE
and Treasury scheme to alleviate bank funding conditions in a speech
Thursday.

In his annual Mansion House speech King says the BOE can both carry
out further monetary easing and aim to lower bank funding costs. He also
announces the BOE is activating the liquidity facility it created for
times of heightened market stress.

The news that King favours further QE as well as a form of credit
easing and liquidity injections shows the BOE launching a raft of fresh
policy initiatives aimed at boosting bank lending and restarting the
stalled economic recovery.

On QE, which has become conventional monetary policy in the UK,
King makes clear he favours further stimulus, saying things have
deteriorated since the MPC’s last set of economic forecasts back in May.

“Since our Inflation Report only four weeks ago, conditions have
deteriorated with weakening business surveys, a downward revision to
measured output and further slowing in economies overseas,” King says.

He argues that QE, based on the BOE buying large amounts of gilts,
can work in current circumstances.

“With signs of a deterioration in the outlook, especially in world
markets, the case for a further monetary easing is growing,” King says.

The BOE Governor restates his arguments against the central bank
buying private sector assets directly, taking the view this would
impinge on areas that should be the domain of government.

Instead, he argues the BOE can step in to ease credit conditions by
providing bank funding, as the heart of the bank crisis is solvency, not
liquidity, as demonstrated by the failure of the European Central Bank’s
vast scale liquidity injections to provide more than temporary relief.

He draws the curtain back on a joint scheme being devised with the
Treasury to provide banks with funding at below market rates for years,
in return to them bolstering lending and he says “it could, I hope, be
in place within a few weeks.”

“The Bank and the Treasury are working together on a ‘funding for
lending’ scheme that would provide funding to banks for an extended
period of several years, at rates below current market rates and linked
to the performance of banks in sustaining or expanding their lending to
the UK non-financial sector during the present period of heightened
uncertainty,” King says.

He outlines the way the scheme would work. The BOE would only lend
against a much greater value of collateral to protect taxpayers, but
with the approval of the Government it will be able to undercut market
pricing.

While this joint BOE/Treasury scheme is designed to ease bank
funding, the BOE is also stepping in to ensure banks have all the
liquidity they want.

Back in December, the BOE announced the creation of a liquidity
facility for times of market-wide stress, the Extended Collateral Term
Repo Facility. King announces in his Mansion House speech that the ECTR
is being activated now.

“The Bank will start holding auctions of sterling liquidity with a
maturity of six months,” he says, with details to be given to market
participants Friday.

BOE Executive Director Markets Paul Fisher set out the thinking
behind the ECTR in a speech in March, saying “the purpose of the ECTR is
to make liquidity available against the least liquid collateral, to the
market as a whole,” with participants engaging in a competitive auction.

King summed up the BOE’s multi-pronged approach to bank support,
saying “On liquidity, funding and capital, the measures that I have
outlined will support the banking sector, and provide it with incentives
to increase lending to the real economy.”

-London Bureau; Tel: +4420 7862 7491; email: drobinson@marketnews.com

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