Some analysts are wrongly claiming that the Bank of England’s asset purchase facility will have no monetary impact. For example, an article in Friday’s Financial Times stated that “the money used to buy the corporate securities will be financed by Treasury sales of government bills rather than the creation of money”.

The simultaneous sale of Treasury bills will ensure no effect on banks’ reserves held at the Bank of England and hence the monetary base M0, implying the scheme does not represent “quantitative easing” in the Japanese sense. Providing Treasury bills are sold to banks, however, while the Bank purchases assets from non-banks, the broad money supply will expand. Banks should indeed absorb much of the increase in the supply of bills, given regulatory pressure to raise their holdings of safe liquid assets.

The potential for the scheme to boost M4 directly is more important than whether it expands the monetary base. M0 growth has already risen significantly as a result of increased Bank of England lending to the banking system, without any noticeable impact on broad money or credit conditions. In the US, wider money measures have accelerated since the Federal Reserve began buying commercial paper and agency securities, having shown little response to earlier initiatives inflating the monetary base.

Another article in the same FT edition claims that quantitative easing can begin only after interest rates have been cut to zero; otherwise “the overnight interest rate in money markets would in any case fall towards zero because commercial banks would find themselves awash with unwanted cash looking for a home overnight”. This is incorrect. Banks are able to deposit excess funds in unlimited amounts at the Bank of England’s operational standing deposit facility, earning interest at Bank rate minus 25 basis points, a level that sets an effective floor for overnight rates.

With the option of underfunding the budget deficit apparently still off the policy agenda, the asset purchase facility represents the best hope for an early and significant revival in broad money growth. Rapidly implemented and suitably expanded, the scheme could lay the foundations for an economic recovery from late 2009.