Quantitative Easing is a policy used by the Bank of England, but what are the consquences?
Quantitative Easing (QE), as it’s oddly called, is a means of increasing the flow of money in the economy. It works by a central bank (Bank of England) purchasing financial assets off banks and other financial institutions and leaving them with a pile of cash to spend.
QE helps the Private Sector in three key ways. Firstly the purchase of the financial assets will increase their price and cause the interest rate that the asset yields to fall. If a company is considering a major investment project, it will have a greater incentive to invest it in a project rather than buying a financial asset. More generally the Opportunity Cost of consumption and will fall. Secondly, where before the bank had an asset giving a fixed return each year, the bank now has cash which does not give any positive return (unless deflation is taking place). The bank will then lend this out to aspiring entrepreneurs, company’s looking to invest and consumers looking to take advantage of the reduced interest rates. Lastly, there are the multiplier effects that follow this.
Whilst QE sounds sensible, it has many unintended consequences.
Firstly the supply of sterling has increased significantly. This means that the Pound is worth less. This is good news for exporters as their products will be cheaper on international markets however imports like oil and other commodities become more expensive. This problem is further exacerbated by other retaliating countries following similar policy. Since QE policies have been adopted by several central banks, there has been a great deal of volatility between currencies, in what some commentators have called a currency war. All this volatility has lead many investors to search for solid stores of value i.e commodities (see below).
FX indexed GOLD (BBC)
$/oz Silver
The increase in commodities has pushed inflation even further. Considering the role of the Bank of England is to control inflation is QE logical? -beacuse the results speak for themselves (see below)
Thoughts and comments welcome.
Informative, however I don't think you answer your own question. QE is designed to stimulate the economy and inflation, so in that sense you could say that it is working. We are currently above the BoE target inflation (2% CPI)currently 4.2%. So i would suggest that there are two questions to pose. Do the costs of inflation at this level cause more harm than the QE provides in support for the economy? If the BoE doesn't increase interest rates and considers the continuation of QE, how does this impact on its credibility to maintain low and stable inflation?
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