It's lift-off for gilts as Bank fires up a £75bn rush to buy

The price of Government bonds soared today as the Bank of England said it would wade into the gilts market, buying up as much as £75 billion of paper to unlock credit markets by improving the liquidity of a range of financial institutions.

As the Bank began its programme of quantitative easing - making more money available to the financial system - Governor Mervyn King said the buying-up of Government bonds (gilts) would be a major weapon.

The Bank said the Governor had agreed with Chancellor Alistair Darling to make £75 billion of central bank reserves available to purchase assets over the next three months, with the majority of that being medium-dated and long-dated gilts.

The Bank said it would buy gilts in the secondary market, where such bonds are held not only by banks but also by other financial institutions such as insurance companies, pension funds and fund managers.

The Bank added that its monetary policy committee would monitor the success, or otherwise, of the boost in money supply and credit, and increase the rate, speed and scale of spending as needed.

In a letter from King to Darling written last month but published today, the Governor said the purchase of gilts would come alongside other programmes to buy up private-sector debt within the financial system.

King said the MPC would remain accountable for the running of the Asset Purchase Facility and vote each month on the retentions of the programme.

The Bank's announcement of its plans sent gilts leaping, with yields tumbling by about 0.15% on medium- and long-dated gilts - which should also generally bring down the cost of borrowing.

Hetal Mehta of the Ernst & Young Item Club said: "The Chancellor has authorised a maximum of £150 billion for quantitative easing, and the £75 billion the MPC is going to use initially is a good starting point in its first attempt to pump money into the system.

"No one knows how much money is required, so the MPC's decision to use half of the authorised amount is sensible. It's a positive sign the Bank is taking its inflation target seriously."

Ross Walker at RBS said: "£75 billion over three months amounts to both a sizeable and speedy injection of liquidity. The extent to which these gilt and private-asset purchases encourage an increase in credit availability and revive nominal demand is highly uncertain.

"Overall, the scale and timing of the quantitative easing operations appear significant - certainly the initial market reaction indicates the announcement went beyond what was expected or priced in.

"The lasting benefits for credit availability and demand are much more uncertain. But given the severity of the macroeconomic and financial backdrop, it is worth a try."