My MPC-ometer projects a further half-point cut in Bank rate to 1.0% tomorrow. This is also the expectation of 61 out of 68 economists, according to a Reuters survey. The model’s forecast is heavily influenced by the 1.5% slump in GDP in the fourth quarter reported a fortnight ago. Further falls in consumer confidence and manufacturing pricing plans and January’s weak stock market performance are also contributory factors.

In my view, another cut in rates is less important than measures to boost underlying broad money growth, which remains too low to support an economic recovery – see here. Improving credit availability is clearly also a priority but credit constraints would be relieved by an increase in the quantity of money circulating in the economy.

The simplest way to boost broad money would be to “underfund” the huge budget deficit, i.e. finance it by borrowing from banks or the Bank of England rather than by issuing gilts. This would not imply a reduction in banks’ capacity to lend to firms and households, because institutions are not required to set aside additional capital against increased lending to the government. Underfunding is a conventional unconventional measure, to use Bank of England Governor Mervyn King’s terminology. It occurred after the early 1990s recession, helping to underpin an economic recovery, and again in 2001-02, when the UK managed to skirt a global downturn.

An alternative to underfunding would be for the Bank of England to use its asset purchase facility to buy securities from non-bank financial institutions and companies. Such purchases would directly boost broad money; by contrast, buying assets from banks has a positive impact only if they respond by increasing lending. The Bank could, for example, buy newly-issued commercial paper or longer-maturity asset-backed securities (more likely to be held outside the banking system).

Whether such transactions boost the monetary base (i.e. currency in circulation and banks’ deposits at the central bank) – thereby qualifying as “quantitative easing” – is of secondary importance. Banks’ unwillingness to lend reflects capital constraints and risk aversion rather than a shortage of cash. Monetary base growth has already picked up significantly as a result of the Bank of England’s expanded lending to the banking system, without any noticeable impact on the broad money supply or credit availability – see chart.

A further interest rate cut could be counterproductive in terms of improving credit availability. Banks need to be able to widen interest margins in order to rebuild capital to support higher lending. As the general level of interest rates approaches zero, however, their ability to lower deposit rates is constrained by increasing competition from government-guaranteed savings products offering full security with little or no loss of income. Forced to lower lending rates to existing borrowers on deals linked to Bank rate or LIBOR, banks may compensate by raising rates charged on new loans.

The Bank of England yesterday reported that banks and building societies had borrowed £185 billion of Treasury bills under the special liquidity scheme (SLS) by the time of its closure on 30 January – broadly consistent with my earlier estimates (e.g. here). The SLS has been superseded by the Bank’s new discount window facility (DWF). Drawings from the DWF will be published quarterly but with a considerable lag – first-quarter figures will be available at the end of June.