The Bank of England has moved to ease the effects of a lack of liquidity in the UK's banking system by offering to swap secure government bonds for riskier mortgage debt.![Sterling has been falling to an all-time low against the European single currency [EPA]](http://mwcnews.net/images/stories/Economy/1/2/3/4/5/6/UK-bank.jpg "Sterling has been falling to an all-time low against the European single currency [EPA]")
Sterling has been falling to an all-time low against the European single currency [EPA]
It is initially offering £50bn ($100bn) of gilt-edged securities, but the size of the scheme will depend on how much banks need to get lending going again.
Mervyn King, a Bank of England governor, on Monday said: "There is no arbitrary limit on it."
Although the move should help to give some much-needed support to the UK banking system, economists have cautioned that the swap scheme alone would not be enough to revive a flagging economy.
Credit crunch
Lena Komileva, a market economist at Tullett Prebon, an inter-dealer broker, said: "It will have a positive impact on the money market, but it's unlikely that it will have any meaningful impact on unlocking mortgage markets."
The Bank of England's plan is its latest move to deal with the impact of the credit crisis on the UK economy.
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Last month, the US Federal Reserve unveiled a $200bn scheme to help mortgage markets.
Since December, the Bank of England has cut interest rates three times to five per cent and provided emergency liquidity to banks.
Of concern to the UK government, however, is that some of those rate cuts have not been passed on to consumers who, faced with rising oil and food prices and falling house prices, are starting to feel the effects of an economic downturn - and who are increasingly disillusioned with Gordon Brown, the British prime minister.
"We will make sure that there is enough liquidity in the economy so that we can continue to lend money for businesses and lend money for people to buy their own houses," Brown said.
No reversal
Analysts said the plan could boost sentiment, but would not reverse the impact of the credit squeeze.
"This is not going to undo the harm that's already been done to the economy," said Alan Clarke, an economist at BNP Paribas. "It might just stop things getting any worse."
After the plan was unveiled, sterling fell, the interbank cost of borrowing three-month sterling funds fell modestly and one-month rates slipped to their lowest level in a year at 5.49 per cent.
It will be at least two months before it would be possible to judge whether the scheme has worked, King said.
Tags: UK bank