The Bank of England is going to start printing money again. It’s about to pump another ÂŁ75bn into the banking system via more quantitative easing (QE). This will be QE II for the UK.
What’s QE all about? (Find out how quantitative easing supposed to work here). I’ll also be writing on what the Bank’s move really means in tomorrow’s Money Morning. But for now, here’s a quick summary.
The Bank is responding to three problems. First, global economic growth is slowing fast. This is bad news for Britain too. Less foreign demand for our exports is making them much tougher to sell. That’s hurting our manufacturing industry.
Second, UK consumers are becoming more and more cash-strapped. We wrote about this earlier today. In a nutshell, this is squeezing spending and slowing our growth rate even more.
Third, the eurozone’s woes are “resulting in severe strains in bank funding markets”. We’ve explained what this means here. But again, to keep a long story short, the supply of credit to both consumers and businesses is drying up.
Normally, to get the economy moving again, the Bank of England would cut interest rates. But it’s already done that. The bank rate is standing at its all-time record low of just 0.5% (by the way, the ECB said today it’s also keeping its official interest rate at 1.5%).
So for the Bank, it’s back to Plan B: ie more QE. Over the next four months, ÂŁ75bn will be spent buying bonds from investors and commercial banks. This will increase cash balances at those banks.
The Bank’s hope is that having more money sloshing around will lower the price, ie long-term loan rates will drop. That could help global growth. The Bank also reckons that pushing extra cash into the banking system could ease those “severe funding strains” and help to boost lending.
Will QE II work? We don’t think so.
I’ll explain our scepticism in detail in tomorrow’s Money Morning. But in short, the last batch of QE did little except to drive inflation higher. Yet the Bank’s already well beyond its target rate of 2%.
Part of the reason we’re in such trouble now is because consumers are being squeezed by rising prices. This latest move won’t help – indeed it may make things worse.
Category: Economics