Sign up with your email address to be the first to know about new products, VIP offers, blog features & more.

Easy does it

First published: Prospect, 04/06/2009

In mid-March the Bank of England unveiled a radical departure from conventional monetary policy. With interest rates at a record low of 0.5 per cent, it announced plans to buy up $75bn of government bonds in a process that became known as quantitative easing (QE). Two months later the bank expanded the programme further, this time to £125bn. The move surprised some in the City, and was widely seen as indicating scepticism over the much anticipated economic green shoots. But what is the real goal of the easing policy?

Conceptually, easing is designed to stop a deflationary spiral. A collapse in credit and asset prices lowers wealth, which leads to falls in consumption, which in turn lowers asset prices again. Ultimately prices and wages begin to fall. Easing works by expanding the money supply directly, encouraging banks to start lending, stabilising demand, and encouraging investors to stop hoarding cash.

That’s the theory. Is it working? We don’t yet know. The original easing announcement caused gilt-edged security yields to fall sharply, in anticipation of the bank buying up lots of government bonds. But they have recently….more