Bank of England set to kick off purchase of distressed assets

LONDON: Bank of England Governor (BoE) Mervyn King said officials may start buying assets within weeks to loosen credit markets as the lowest UK interest rates since 1694 fail to avert a "marked" recession.

The central bank may acquire securities such as corporate bonds and commercial paper to bolster lending to companies and consumers as banks rebuild balance sheets damaged by the global financial crisis, King said late on Tuesday.

The bank said on Wednesday officials opted not to cut its key rate by one percentage point this month on concern it might unsettle markets.

"There remains a risk that inflation will fall below 2%," the target rate even after the recent round of rate cuts, King said in a speech in Nottingham, England. "It is sensible for the Monetary Policy Committee to prepare for the possibility ��� and I stress that we are not there yet ��� that it may need to move beyond the conventional instrument" of the bank���s benchmark interest rate.

While the Bank of England has cut the rate by 3.5 percentage points to the current 1.5% since October, that won���t prevent an economic contraction in the first half of the year, he said.

King backed Prime Minister Gordon Brown���s plan to give the Bank of England unprecedented powers to buy securities, unveiled on January 19 along with a 100-billion pound ($140 billion) bailout for banks.

Those tools may later be expanded to fight deflation as the British economy faces a recession this year that may be the worst since the aftermath of World War II. "This is a momentous speech that sets the policy agenda for the next decade," said Lena Komileva, an economist at Tullett Prebon in London.