(Adds detail on how to judge success of QE, market size)
By David Milliken
LONDON, March 5 (Reuters) - The Bank of England has no guarantee of success for its new 150 billion pound fund to buy up financial assets, which aims to get banks lending again, after slashing rates has so far failed to do the job.
British finance minister Alistair Darling has given the BoE a 150 billion pound budget to buy assets such as UK government debt from banks with newly created central bank money, boosting commercial banks' coffers to encourage them to lend.
This is at the upper end of analysts' estimates, and all eyes will be on the BoE to see if it will succeed where the Bank of Japan failed at the start of the decade in using so-called 'quantitative easing' to ensure that banks swiftly restart lending to creditworthy firms and consumers on reasonable terms.
NO GUARANTEE OF MACROECONOMIC SUCCESS
The BoE is moving into uncharted territory with its quantitative easing policy.
The Bank of Japan was the first big central bank to have pursued a QE policy, in the early 2000s, and failed to have any quick success due to deep-rooted problems of undisclosed bad debts in the country's banking system.
Economists are hopeful that British banks have been more upfront about their losses, but there is still a big risk that they will use the BoE money to reduce the gearing on their balance sheet -- making them safer institutions but doing nothing to stimulate economic demand.
Much will depend on parallel government policies to cajole Britain's big banks to lend prudently but reasonably -- especially as many of the foreign lenders who fuelled Britain's property and borrowing boom over the past decade have quit.
But this is easier said than done, despite the fact that the government now holds dominant stakes in lenders Royal Bank of Scotland, Lloyds Banking Group and Northern Rock.
The Bank of England is likely to judge its success by increased activity and lower risk spreads in corporate bond markets, as well as the growth of M4 money supply.
Longer term, the BoE has to maintain public confidence that it will get inflation back up to its 2 percent target. It has already said that inflation is likely to be just 0.5 percent in two years' time.
If it fails, it risks a Japanese-style deflationary spiral where consumers and firms postpone spending because they expect prices to be cheaper later, crippling growth and investment.
GILT PURCHASES TO START ON MARCH 11
The BoE plans to start the first of a series of twice-weekly gilt auctions on March 11, and has said it will focus on conventional gilts with maturities of five to 25 years.
The BoE stressed it was keen to avoid distorting the gilt market, and will not initially buy from issues with less than 4 billion pounds or from inflation-linked or ultralong gilts that are typically less liquid.
Nonetheless, the BoE plans to spend 75 billion pounds buying financial assets, mostly gilts over the next three months -- equivalent to over half of this fiscal year's entire new issuance, itself a record sum
The BoE's announcement caused gilt prices to surge, with 30-year gilts rising their most in a decade according to some strategists, outperforming shorter-dated gilts despite the BoE's protestations that it did not want to distort the market.
The government has also said it will not change its 2008/09 issuance plans in response.
"75 billion pounds over three months amounts a both a sizeable and speedy injection of liquidity," said Ross Walker, economist at Royal Bank of Scotland.
"It is roughly 5 percent of nominal GDP and, in terms of money supply aggregates, compares to around 50 billion pounds of notes and coins in circulation," he added.
The BoE says that the total amount of gilts in issue is around 720 billion pounds, but only 250 billion pounds of that falls within the maturities they are targeting.
RATES WON'T GO ANY LOWER
The BoE has cut rates by 4.5 percentage points since October to a historic low of 0.5 percent, after its main concern shifted from record inflation as recently as September to the prospect of deflation and a lengthy economic slump.
But a key feature of this downturn has been that banks have not passed on rate cuts in full and reined back lending even more than usual.
The BoE said in its monetary policy statement on Thursday that "a very low level of Bank Rate could have counterproductive effects on the operation of some financial markets and the lending capacity of banks". (Additional reporting by Fiona Shaikh)