The most important parts of today’s package of financial support measures are the new Bank of England asset purchase facility and the commitments by Northern Rock and RBS to expand lending relative to previous plans. These have the potential to have an immediate impact on credit supply and monetary growth.

The asset purchase facility is significantly smaller than equivalent Federal Reserve initiatives but can be expanded at the request of the Monetary Policy Committee. The Fed has bought $335 billion of commercial paper and plans to purchase up to $500 billion of mortgage-backed securities – the $835 billion total is the equivalent of 10% of the broad money supply M2. The Bank’s asset purchase facility has been set initially at £50 billion, equivalent to 2.6% of broad money M4 (a wider definition than US M2).

The monetary impact of this programme will be supplemented by a slowdown in the rate of contraction of Northern Rock’s mortgage book and the commitment by RBS to maintain credit availability to large corporations as well as homeowners and small businesses and increase lending by a further £6 billion over the next 12 months. Rock’s previous business plan implied a further £20-25 billion reduction in its mortgage lending in 2009. If its mortgage book is now stabilised, the Rock / RBS initiatives together could add £30 billion to credit supply in 2009 – equivalent to a further 1.6% of M4.

The initial £50 billion purchase under the Bank of England asset purchase scheme will be financed by issuing Treasury bills, implying no impact on the monetary base – so it does not amount to “quantitative easing”. However, growth in the base has already picked up as a result of the Bank’s expanded lending to the banking system and the priority now is to boost broad money M4. The scheme will achieve this providing 1) the Bank buys assets from UK companies and non-bank financial institutions and 2) new Treasury bills are bought mainly by banks, as is likely. In other words, if successful, the scheme will amount to “printing money” to buy private-sector assets. (In theory, the MPC could request that the monetary base impact of a future expansion of the programme is not sterilised by issuing more Treasury bills, implying “quantitative easing”.)

The other parts of today’s package – in particular, the asset protection scheme and the guarantee scheme for asset-backed securities – have the potential to boost credit supply and monetary growth over the medium term but only if fees are set at non-penal levels. Prior UK financial support measures have been more expensive than equivalent schemes in other countries, reducing their effectiveness.

While welcome, today’s package is not all that might have been desired. In particular, the authorities continue to resist pressure to “underfund” the budget deficit in order to boost M4. This could have an immediate and significant impact in relieving the current corporate liquidity squeeze and would complement efforts to improve credit availability.