Quantative easing

Quantative easing

March 18th, 2009

The Bank of England (BoE) made history in March 2009 with the news that it was to begin a radical programme of quantitative easing. Quantitative easing helps to increase or reduce the supply of money held in commercial banks’ reserve accounts at the central bank. The BoE will buy £75 billion-worth of securities from commercial banks, and will pay for them by adding money electronically to the banks’ reserve accounts. Although quantitative easing has been described as “printing money”, the BoE does not put new banknotes into circulation; the process is purely electronic, although it does result in the creation of new money. Importantly, the BoE is not giving money away; it is buying assets from the banks, and it will sell these assets at a later date, reversing the effects of quantitative easing. However, it is vital that the BoE gets the timing right and reverses the policy before inflation is driven too high. The BoE hopes that banks will weary of squirreling away their cash for a minimal return and decide to lend out the money at a more profitable rate, making it easier for companies and individuals to get mortgages and loans and helping to revive spending. A lack of credit is one of the most significant problems confronting the UK economy, so action that increases the supply of money and the availability of credit is welcome. However, whether the commercial banks choose to increase their lending activity or hoard the additional capital remains to be seen. For independent financial advice on pensions, savings & investments and protection call Mark or Clare on 0207 2886400 

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