The Bank of England is expected to issue more money in its latest effort to kick start the ailing UK economy.
The idea of issuing more money sits uneasy with the British public, many of whom have Zimbabwean visions of spiralling inflation and worthless currency. So what does the process of quantitative easing actually involve?
Quantitative easing is a last ditch attempt to pump money back into the flagging economy. The traditional method of stimulating the economy is to cut interest rates, which should encourage spending. We're now in the situation where interest rates are at rock bottom (5th Mar edit: the Bank of England base rate fell to an all-time low of 0.5% today) and still no-one has the confidence to spend.
In this situation the central bank (the Bank of England) injects cash into the economy by effectively buying assets from ordinary banks in exchange for currency. Cash doesn't change hands directly - what happens is that the central bank increases the reserves of the ordinary banks, which in turn gives them a buffer zone to increase lending to their customers. This should mean more money floating about the high street, which should stave off the serious risk of deflation.
That's the theory anyway, but will it work in practice?
Nobody knows because it's uncharted territory for the Bank of England. The US Federal Reserve and Bank of Japan have been using quantitative easing for several years with an apparent degree of success.
The idea could backfire if the ordinary banks decide to sit on their bolstered reserves instead of passing anything to the customer.
Hold on tight because there's still a very rough ride ahead!
The idea of issuing more money sits uneasy with the British public, many of whom have Zimbabwean visions of spiralling inflation and worthless currency. So what does the process of quantitative easing actually involve?
Quantitative easing is a last ditch attempt to pump money back into the flagging economy. The traditional method of stimulating the economy is to cut interest rates, which should encourage spending. We're now in the situation where interest rates are at rock bottom (5th Mar edit: the Bank of England base rate fell to an all-time low of 0.5% today) and still no-one has the confidence to spend.
In this situation the central bank (the Bank of England) injects cash into the economy by effectively buying assets from ordinary banks in exchange for currency. Cash doesn't change hands directly - what happens is that the central bank increases the reserves of the ordinary banks, which in turn gives them a buffer zone to increase lending to their customers. This should mean more money floating about the high street, which should stave off the serious risk of deflation.
That's the theory anyway, but will it work in practice?
Nobody knows because it's uncharted territory for the Bank of England. The US Federal Reserve and Bank of Japan have been using quantitative easing for several years with an apparent degree of success.
The idea could backfire if the ordinary banks decide to sit on their bolstered reserves instead of passing anything to the customer.
Hold on tight because there's still a very rough ride ahead!
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