The Bank of England is set to drop a further £25bn of printed cash into its economy in an effort to pull the UK out of the longest recession in the country’s history. The bank’s monetary policy committee, which is responsible for setting the bank’s interest rates, extended its quantitive easing programme to a total of £200bn – or 14% of UK GDP. This was after the monthly meeting that showed the UK economy shrinking by another 0.4% in the third quarter.

Quantitive easing is based on the printing of new money by the country’s central bank. This is done in order to increase the supply of money in the economy. Quantitive easing has historically been used by the Bank of Japan in order to fight deflation in the early 2000 and more recently this policy was adopted by the US Federal Reserve and also the UK’s Bank of England in an attempt to counteract the recessions in both countries. Quantitive easing is an attempt to increase money within the financial system, which in turn eases the pressure on the banks by giving them extra capital to deal with. The UK’s quantative easing is attempting to help the economy in three ways. The first is by buying long term glits, which pushes up their prices and drives down their yields. This should in turn raise the prices of other assets like corporate bonds, bringing down the cost of private sector borrowing. Companies are able to raise capital through bonds while offering a smaller yield. This will in turn make it less likely that the company will need to cut jobs.

The policy should also boost the cash and deposits which will then support spending within the economy. The boost in cash is an attempt to starve off fears of inflation and give a general boost to the confidence in the economy in general. The £25bn will be drizzled into asset purchases over a three month period Rates continue to be held at 0.5%.

The question of when the rates will rise will be a tough decision. The MPC went down the middle of the road, some annalists are predicting increases while others are predicting no movement. Current incoming data is difficult to decipher, many indicators are showing growth, such as higher new car registrations and higher manufacturing output. The economy is still on edge and confidence has not returned. Until two weeks ago, the quantitive easing program was thought to be over because data suggested Britain had caught up with its European neighbours and had returned to growth in its third quarter.

The world economy appears to be inseparably linked and all nations are dealing with the economic downfall. It is undetermined how long this recession will last as some indicators show that it is already over, while other indicators show it still in full swing. It is clear that currently, the economies of the world still need the help from their governmental entities to keep them from falling further.



Source by Tom Sangers