In Mervyn King the UK Trusts?

03/11/09 03:17PM EDT
Bank of England Governor King argued today that its newest measure to buy 2 Billion Pounds ($2.7 Billion) of government bonds with newly created money will “work in the long run” to prevent further deflation.

Today’s monetary action is the first installment in a 3-month plan of the central bank to spend as much as 75 Billion Pounds on bonds, whose maturities range from 2014-2018, and comes after officials cut the interest rate to a record low of 0.5% last Thursday.

King hopes that the “new money” being pumped into the financial system will work to help return inflation to the 2% target and promote what PM Brown stressed in late February, namely, that “domestic growth would come from granting loans to first-time buyers, entrepreneurs, and individuals of middle and modest incomes.”

For the UK to turn around the deflationary current, King is relying on UK Banks to pass the line of credit onto lenders. With data out today that the UK trade deficit widened in January to 7.7 Billion Pounds (from 7.2 Billion Pounds a month earlier) and the UK economy contracted 1.8% in the quarter through February, King will have to track more than just loans reaching Main Street to get a handle on controlling the inflation/deflation balance.

Matthew Hedrick
Analyst
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