March 5 (Bloomberg) -- Bank of England Governor Mervyn King will take the unprecedented step of printing money to buy assets after reducing the benchmark interest rate by a half point to almost zero.

The bank said it will pump cash into the economy by purchasing as much as 150 billion pounds ($211 billion) in government and corporate bonds, sparking a rally across the debt market. It also cut its key rate to a record low of 0.5 percent. Separately, the European Central Bank reduced its own benchmark to 1.5 percent and signaled it may cut further in coming months.

Europe’s major central banks are adopting different speeds as they seek to reverse deepening recessions at the same time as they increasingly run out of room to trim rates. ECB President Jean-Claude Trichet said today that he isn’t yet prepared to expand his arsenal to include unorthodox policy tools even as King follows the Federal Reserve in doing so.

“We’re moving into a new world in the U.K. from interest- rate adjustment to quantitative easing,” said Charles Goodhart, a former member of the central bank’s Monetary Policy Committee. “It’s a great deal more uncertain how things will be done. This month what the MPC says is going to be much more important than what they do.”

Market Reaction

U.K. 10-year government bonds rose, pushing the yield down by as much as 40 basis points to 3.24 percent, the most since Bloomberg began collecting intraday data in 1992. Company bonds denominated in pounds rose by the most in more than a decade, according to the Markit iBoxx Sterling Corporate bond index.

“It is very unlikely interest rates will go any lower,” King said in an interview on Sky News. “What we’re trying to do now is push the supply of money up.”

In a statement accompanying its decision, the Bank of England said it may take up to three months to carry out the asset purchases. Most securities will be U.K. government bonds known as gilts.

“It is necessary for us to take a range of measures to help people, help businesses get through this recession,” Chancellor of the Exchequer Alistair Darling told broadcasters. “America has been doing something like this for several months. You will see countries all over the world taking action to make sure there is enough money in the economy.”

Rates Reduced

The Bank of England has now reduced the key rate 4.5 percentage points since October, while the ECB has lopped its benchmark by 2.75 percentage points. The U.S. Federal Reserve kept its rate at a range of zero to 0.25 percent last month and has been buying assets. The Bank of Japan yesterday bought corporate bonds from lenders for the first time.

Credit markets in the U.K. are still frozen in spite of the Bank of England’s actions. Net lending to consumers rose at the slowest pace since at least 1993 in January. The difference between three-month London interbank offered rates and the central bank’s benchmark was 102 basis points yesterday, compared with an average of 21 basis points in 2006.

Trichet indicated policy makers in the 16-nation euro area will lower their main rate again after today’s half-point shift. The Frankfurt-based central bank today downgraded its outlook for the economy and its president said it expects inflation to stay “well below” its 2 percent ceiling this year and next.

ECB Decision

The ECB has been reluctant to be as aggressive as other central banks for fear it would sow the seeds of future crises. Trichet said today that while the ECB is researching unconventional policies such as buying securities, it hasn’t yet decided to use them.

“We have absolutely no pre-commitment,” Trichet said.

The ECB cut its forecast to show its economy contracting about 2.7 percent this year, down from December’s expectation for a 0.5 percent decline. New data today showed consumer spending and investment contracted by the most in at least 13 years in the fourth quarter when the economy shrank 1.5 percent.

The Bank of England has already begun buying commercial paper through its 50 billion-pound asset purchase facility, financed with Treasury bill sales. Plans to start purchasing commercial bonds have drawn criticism from analysts in London because it won’t help borrowers that are already shut out of debt markets.

Policy makers unanimously decided last month that King should seek authority from Chancellor of the Exchequer Alistair Darling for quantitative easing by buying government bonds and other securities without funding through debt sales, to raise the money supply.

‘Leap in the Dark’

“It’s a leap in the dark,” George Osborne, the finance spokesman for the opposition Conservatives, told BBC Radio 4. “It’s effectively printing money, but because all the other government policies haven’t worked, I don’t think the Bank of England was left with any options.”

Along with the central bank’s measures, Brown’s government has pledged billion of pounds to shore up Britain’s banking system. Last week he promised 325 billion pounds of support for Royal Bank of Scotland Group Plc’s investments, while Lloyds Banking Group Plc is also in talks on a government asset insurance program.

Brown is counting on government bailout money and the bank’s action to prop up the economy before the middle of 2010, the deadline for the next election. He will seek support from leaders of the Group of 20 nations in April for another boost in fiscal spending after a 20 billion-pound infusion of tax cuts and investment in infrastructure last year.

Economy in Recession

The U.K. economy contracted 1.5 percent in the fourth quarter, the most since 1980, as consumers curtailed spending. Former central bank Deputy Governor John Gieve said Feb. 20 the nation faces a “serious risk” of a decade-long depression as the credit squeeze hampers growth.

“The committee judged that this reduction in bank rate would by itself still leave a substantial risk of undershooting the 2 percent CPI inflation target in the medium term,” the bank said in a statement. “Accordingly, the committee also resolved to undertake further monetary actions, with the aim of boosting the supply of money and credit and thus raising the rate of growth of nominal spending.”

Michael Page International Plc, the U.K.’s second-largest recruitment company, said today that full-year profit dropped 4.3 percent as it was hurt by the global recession. IMI Plc, the world’s biggest maker of pneumatic controls, said yesterday it has cut its global workforce by 10 percent and plans further reductions in coming weeks to weather falling demand.

Central bank forecasts published last month show economic growth will resume in the second quarter of next year while inflation will slow to 0.3 percent in early 2011, below the bank’s 2 percent goal.

“The bank’s forecasts on the speed of the recovery seem to be extremely optimistic,” said Jonathan Loynes, an economist at Capital Economics Ltd. in London. “It’s going to be some time before growth returns.”

To contact the reporters on this story: Jennifer Ryan in London at Jryan13@bloomberg.net; Brian Swint in London at bswint@bloomberg.net.

Last Updated: March 5, 2009 13:25 EST