Quantitative Easing _ Bank of England

Quantitative Easing - Bank of England

The Bank of England is to inject £75bn into the economy to stimulate lending.

Quantitative easing is a term used to explain the process of the UK Government printing money to buy assets from finance companies thus improving money supply and hopefully encouraging finance companies to lend money.

In the current climate quantitative easing will mainly be buying back long dated gilts from Banks i.e.  money owed by the Government to the banks i.e.  loans.  To explain what a gilt is, the Government borrows money from finance companies and in return issues a Gilt edged security share (a fixed interest rate bond).

Many finance companies and banks have been holding their long term Gilts to receive secure and known returns from the Government rather than lending to each other or to the public in mortgage form in view of the increased risks of non-repayment in a recession.

Quantitative easing will mean that the Government will buy back the Gilt (i.e.  repay their own loan) to the banks giving banks liquid cash.  It is suggested that this controlled quantitative easing will start to run through the whole banking system and kick start lending and spending.

We suggest quantitative easing may come back to bite us in the form of higher inflation.  The Government maintain that hyper-inflation will not occur, we suggest that the use of quantitative easing will bring inflation because printing billions in £20 notes and circulating them will increase spending, creating demand which ultimately leads us back into a vicious circle of inflation and interest rate increases.

Expect high interest rates in about 2-3 years.

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