This has been accompanied by falls in yields on non-financial corporate bonds of up to around 30bp. And since the Bank started to operate in the commercial paper market, spreads have tightened and issuance has increased. These developments have been mirrored in the positive feedback the Bank has received from issuers of commercial paper. Over the coming weeks and months, the MPC will be monitoring a wide range of indicators as we form an initial assessment of the likely effectiveness of the asset purchase programme in stimulating nominal spending. A critical issue will be the extent to which movements in asset prices and market spreads are translated into lower borrowing rates faced by businesses and households. Equally important will be the extent to which the additional liquidity and lower borrowing rates act to spur the growth of broad money and credit. I am confident that increasing the supply of money will eventually lead to an increase in nominal demand. But there is considerable uncertainty about the relative importance of the different channels through which it may work. As such, I welcome the eclectic, twin-track approach adopted by the Committee. There is also considerable uncertainty about the overall size and timing of the impact of the monetary expansion on nominal spending and on the prospects for inflation.
I find it helpful to summarise the different mechanisms through which asset purchases may boost nominal spending into three broad channels. 4  BIS Review 46/2009  First, the purchases of gilts will act to increase their prices and reduce their yields. This change in the relative attractiveness of holding gilts is likely to cause investors to reallocate their portfolios into other assets, such as corporate bonds, which in turn will tend to reduce the yields on those assets. In so doing, the borrowing costs faced by firms and households should fall. As of today, the Bank has purchased £ of gilts from investors. Second, purchasing assets with central bank reserves will significantly increase the amount of liquidity in the system. This expansion in the supply of money may in itself encourage greater levels of lending and borrowing. Bank deposits are likely to increase, providing banks with a ready source of funding to finance additional lending. Similarly, as the additional liquidity permeates through the economy, companies may feel less constrained by the need to hoard liquidity and more able to undertake investment projects. Third, purchases of high-quality corporate debt should help to improve the functioning of corporate credit markets. Strains on financial institutions’ balance sheets, combined with heightened levels of uncertainty and risk aversion, have impaired the liquidity of key corporate credit markets. Firms’ access to some of these markets has been restricted and the cost of credit inflated.