Last week the Bank of England surprised commentators with the scale of its post-Brexit monetary stimulus package. It included a new £70bn round of quantitative easing (QE), the first since 2012, as well as the more widely predicted 0.25% cut to interest rates, writes Josh Ryan-Collins, Associate Director of the Economy and Finance team at New Economics Foundation in the article from 12th August 2016.
Here’s an extract:
The idea of QE is that by buying up safe financial assets like government bonds in large quantities and taking them out of the market, the Bank of England will make more risky ‘real economy’ investments more attractive to investors – buying shares or bonds in businesses. The Bank’s previous £375bn worth QE was almost entirely made up of purchases of government debt, with the previous Governor Mervyn King apparently reluctant to buy assets from companies.
The question that NEF and others have raised a number of times is whether this will translate into more money being lent and spent in the real economy. Investors have other options apart from simply buying corporate bonds or equity. For example buying foreign government debt or non-corporate assets such as currency derivatives. There is also evidence of negative side-effects from QE. It tends to inflate shares and house prices, helping the rich more than the poor. It also hurts savers, pension funds and insurers, who typically invest in the same safe government bonds and see their returns falling as the interest rates on these assets are pushed down.
Read the whole article here.