Quantitative Easing – What…?

Thursday, March 26th, 2009 | Financial Digest

UK interest rates reached a new low in March as the Bank of England (BoE) cut rates from 1% to 0.5%. The cut, which was widely expected, brings interest rates even closer to zero, reducing the BoE’s scope to boost economic activity through monetary policy.

The news that UK interest rates had fallen yet again triggered renewed concerns about the outlook for savers, who have been badly hit by the dwindling rates on their deposit accounts. The Building Societies Association went so far as to describe March’s rate cut as “a kick in the teeth for savers”, while the Confederation of British Industry criticised the BoE’s ongoing series of rate reductions, describing them as “becoming less and less effective as a means of stimulating the economy”. Lower rates are also likely to renew pressure on sterling, which has already weakened substantially.

In a radical and unprecedented move, the BoE announced that it intends to pump £75 billion into the financial system by buying securities from banks in return for additional credit. Although this measure – known as “quantitative easing” – is sometimes described as “printing money”, no new banknotes are actually produced; nevertheless, because the BoE’s asset purchases are not funded by debt, they should increase the circulation of money in the financial system. Many experts believe that a lack of available credit is a far bigger problem than the cost of borrowing and the BoE is likely to hope that its programme of quantitative easing will help to alleviate this problem.

Tags: Financial News, Interest Rates, Savings, stock markets

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