More QE coming our way…

The Bank of England has today announced an additional £100 billion of asset purchases (Quantitative Easing, or QE), but what does this mean, and what are the implications?

Effectively the bank is printing money and using it to buy U.K. government bonds and certain high-quality corporate bonds. In the first instance this helps to keep bond prices elevated and yields low, keeping the cost of borrowing down for the government at a time when it is having to borrow huge amounts to prop-up the economy during the coronavirus crisis.

It also helps make it cheaper for households and businesses to borrow money. At the same time asset prices generally are indirectly buoyed by the bank’s actions, improving sentiment and confidence. Increased confidence about one’s finances and wealth, tends to lead to more spending (particularly if debt is inexpensive), and consumer spending makes up two-thirds of the economy’s output (GDP). So, it’s all good?

Well not quite. One of the main criticisms of QE is that the extra money ‘printed’ does not filter down to the majority, but rather inflates asset prices for those lucky enough to hold them in significant amounts, leading to greater polarisation of wealth. It also has a disproportionately positive effect on London and the South-East, via its banking and real-estate sectors – the regions benefit less. Low interest rates also hurt savers and detract from pensions as annuity rates are dragged lower.

But perhaps the most insidious threat is one that current conditions make everyone complacent about – inflation. The extra money in the economy won’t push prices up when everyone’s downbeat and pessimistic, but it could easily do so when the mood changes.

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