The Bank of England today started its Asset Purchase Facility – buying financial assets on the open market.

The deal is funded by £50 billion worth of Treasury bills and is overseen by the monetary policy committee (MPC) and is being seen as the first step towards quantitative easing.

The current operations are limited to purchases of assets designed to ease credit blockages – with the broad aim of improving financing conditions for larger companies.

Quantitative easing will see the Bank of England increasing the UK money supply by buying assets, but not by the government raising money first.

Often depicted as the government printing more money, the MPC is to vote next month on whether it will buy up government debt without the Treasury issuing bonds to fund the purchases.

Bank of England governor Mervyn King confirmed this week interest rates will not have to fall to zero per cent before quantitative easing occurs.

“Bank rate doesn’t have to go to zero,” he told reporters.

“I think we’re getting now to the range where you know it doesn’t make a great deal of difference where it is. So I think we are at the point where we need to think about this wider set of actions.”

He added: “It clearly is something which the forecast implies that we’re going to want to discuss very seriously and we’ll come back to that at our next meeting.”

However, Jonathan Loynes at Capital Economics explained there were no guarantees that quantitative easing would boost high street lending.

“If the MPC purchases government bonds from banks – what Mr King has described as ‘conventional unconventional measures’ this will increase banks’ reserves and hence widen the monetary base.

“But there is no guarantee that this will translate into an increase in the broad money supply and the supply of credit to households and companies,” he said.

“Banks could simply hoard the extra reserves, as occurred during Japan’s unsuccessful attempts to engage in quantitative easing.”

He added the MPC could increase purchasing private sector assets – as it is doing from today – to provide greater help on the high street, but stated “the supply of money would rise, but it might not get spent”.

Mr Loynes suggested the Treasury could consider more tax cuts funded by Bank purchases of government debt.

“This is the ‘helicopter drop’ scenario in which, in theory at least, an infinite amount of money could be created and distributed throughout the economy.”

However, this approach would not be failsafe as consumers could save any gains from tax cuts aware higher public debt would mean taxes would have to rise in the longer term.