King lays out details of Bank of England debt purchases

In a speech to the Confederation of British Industry in Nottingham, King said the Bank would aim to reduce spreads on corporate debt, now at their highest levels since the 1970s. "The Bank estimates a significant element of this spread represents an illiquidity premium which could be reduced somewhat by increasing activity and liquidity in the market," he remarked.

Purchases of UK corporate bonds and commercial paper would start within weeks rather than months, with details of the Bank's plan to be published by January 31. UK corporate bond prices have fallen sharply since September: the Markit iBoxx corporate bond index was at 81.3 today, down from 93.6 on September 1.

Buying up corporate debt would stimulate new issuance and reawaken the wholesale capital markets, reducing the economy's reliance on bank lending, King argued, and could help strengthening banks by improving the market prices of assets on their balance sheets. Additionally, it could be used as part of a package of "unconventional measures" to further the Bank's monetary policy.

The Bank's Monetary Policy Committee (MPC) has historically relied on changes to the bank rate to keep inflation within its target range, but with the rate now at a record low of 1.5%, this may no longer be effective. King suggested the Bank could start using asset purchases not only to support the credit markets but also as an instrument of monetary policy. Buying gilts would be one approach, which King described as "conventional unconventional"; buying other assets such as corporate bonds would be an "unconventional unconventional" tool of monetary policy, but it would still affect inflation through increasing the money supply.

King emphasised that "we are not there yet" but called on the MPC to prepare for asset purchases as an inflation control measure. In the meantime, support measures for banks, such as the Asset Protection Scheme announced this week, would help monetary policy moves by the Bank be more successful, he said.

See also: UK government creates £50 billion ABS fund
Households and corporates suffer worsened credit conditions
Interbank lending benefits from rates cuts
Fed opens $800 billion war chest to aid securitisation recovery
Demand wanes for central bank liquidity schemes

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