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QE Q&A: What is quantitative easing and does it work?
By ADRIAN LOWERY
The Bank of England has recommenced its quantitative easing programme to rescue the UK's ailing economic recovery. We ask what is QE, how it works - and whether it works.
What is quantitative easing?
QE is an emergency tool of monetary policy that the Bank of England can use to boost the UK economy. Cutting interest rates is the principal way the Bank can fire up economic activity but rates have been cut as low as they can go.
How does it work?
The Bank generates fresh amounts of electronic money to encourage lending to businesses. Specifically, the Bank buys assets like Government and corporate bonds with its new cash. The companies selling those assets - usually commercial banks or other financial businesses such as insurance companies - will then have new money in their accounts, which in turn should feed into the wider economy.
So it's not really 'printing money'?
Not in the literal sense, no. And not in the sense that money was printed in Weimar Germany or more recently in Zimbabwe. That money was used to fund massive government deficits and led directly to hyperinflation. This is outlawed under the Maastricht Treaty.
Haven't we had QE already?
The Bank has already issued £200billion in QE: it started in March 2009, when it had already cut rates to the record low of 0.5% - where they remain – but when the UK economy was still struggling to emerge from recession. It then injected the cash in tranches over the following 11 months, after which it closed off the scheme.
Did it work?
According to research recently published by the Bank, yes. A report from the Bank found the stimulus measure provided a 'significant' benefit to growth and helped GDP increase by around 1.5% and 2%. This was equivalent to dropping interest rates by between 1.5% and 3%, the Bank found. Others are more sceptical that it is possible to attribute such economic dividends to QE.
Didn't it fuel inflation?
Again, according to the Bank, not as much as many had expected it to. Its study found the consumer prices index rate of inflation increased by between 0.75% and 1.5% following the last round of QE. But inflation now stands at 4.5%, way above the Government's 2% target.
So why more QE now?
The UK economy looks in danger of slipping into a second dip of recession. Data on the economy is increasingly downbeat, with second-quarter growth downgraded to just 0.1%, and instability in financial markets and the eurozone debt crisis have raised the risk of another fully-fledged recession. Moreover, banks are worried about the strength of their finances and not lending to businesses or individuals.
How much is the Bank spending?
The MPC has announced a further £75bn for the moment, bringing the QE total to £275bn. It ha said the new round will last three months which has led soem economists to assume it is planning to inject another £300bn - i.e., £500bn in total.
Will it work again?
Fears of debt contagion from Europe and major changes to regulation in the UK still mean banks are being cautious with their balance sheets: they could just hoard the cash they get from selling assets to the Bank.
What about inflation?
The Bank will say that QE is necessary to stop inflation falling too far below its 2% inflation target on the two-year horizon.
Read more: http://www.thisismoney.co.uk/money/news/article-2045943/QE-Q-A-What-quantitative-easing-does-work.html#ixzz1aD69ANc4
By ADRIAN LOWERY
The Bank of England has recommenced its quantitative easing programme to rescue the UK's ailing economic recovery. We ask what is QE, how it works - and whether it works.
What is quantitative easing?
QE is an emergency tool of monetary policy that the Bank of England can use to boost the UK economy. Cutting interest rates is the principal way the Bank can fire up economic activity but rates have been cut as low as they can go.
How does it work?
The Bank generates fresh amounts of electronic money to encourage lending to businesses. Specifically, the Bank buys assets like Government and corporate bonds with its new cash. The companies selling those assets - usually commercial banks or other financial businesses such as insurance companies - will then have new money in their accounts, which in turn should feed into the wider economy.
So it's not really 'printing money'?
Not in the literal sense, no. And not in the sense that money was printed in Weimar Germany or more recently in Zimbabwe. That money was used to fund massive government deficits and led directly to hyperinflation. This is outlawed under the Maastricht Treaty.
Haven't we had QE already?
The Bank has already issued £200billion in QE: it started in March 2009, when it had already cut rates to the record low of 0.5% - where they remain – but when the UK economy was still struggling to emerge from recession. It then injected the cash in tranches over the following 11 months, after which it closed off the scheme.
Did it work?
According to research recently published by the Bank, yes. A report from the Bank found the stimulus measure provided a 'significant' benefit to growth and helped GDP increase by around 1.5% and 2%. This was equivalent to dropping interest rates by between 1.5% and 3%, the Bank found. Others are more sceptical that it is possible to attribute such economic dividends to QE.
Didn't it fuel inflation?
Again, according to the Bank, not as much as many had expected it to. Its study found the consumer prices index rate of inflation increased by between 0.75% and 1.5% following the last round of QE. But inflation now stands at 4.5%, way above the Government's 2% target.
So why more QE now?
The UK economy looks in danger of slipping into a second dip of recession. Data on the economy is increasingly downbeat, with second-quarter growth downgraded to just 0.1%, and instability in financial markets and the eurozone debt crisis have raised the risk of another fully-fledged recession. Moreover, banks are worried about the strength of their finances and not lending to businesses or individuals.
How much is the Bank spending?
The MPC has announced a further £75bn for the moment, bringing the QE total to £275bn. It ha said the new round will last three months which has led soem economists to assume it is planning to inject another £300bn - i.e., £500bn in total.
Will it work again?
Fears of debt contagion from Europe and major changes to regulation in the UK still mean banks are being cautious with their balance sheets: they could just hoard the cash they get from selling assets to the Bank.
What about inflation?
The Bank will say that QE is necessary to stop inflation falling too far below its 2% inflation target on the two-year horizon.
Read more: http://www.thisismoney.co.uk/money/news/article-2045943/QE-Q-A-What-quantitative-easing-does-work.html#ixzz1aD69ANc4
