More Quantitive Easing Expected in the UK and US

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Federal Reserve officials are considering topping up the $2.3 trillion already introduced to the stalled US economy. Image credit: Dani Simmonds

The Bank of England has called for more quantitive easing (QE), planning the purchase of £50 billion worth of government bonds over a four month period in 2012, which will bring the total amount of bonds purchased to £375 billion.

With the US economy also still floundering, reports  are emerging that the US Federal Reserve are considering following in the UK’s footsteps and embarking on a third round of asset purchases.

A Reuters poll of Wall Street economists has revealed that the chance of QE3 occurring this year has increased from 50% (at June 20, 2012) to 70% at the time of reporting.

The predictions are a result of cuts in growth forecasts and persistently high unemployment rates, signalling a lack of progress in the recovery of the economy as a whole.

With the Federal Reserve having already invested an additional $2.3 trillion dollars into the economy, speculation continues about how much additional purchases we can expect to see if the plans proceed.

How does QE work?

QE is often referred to as ‘printing money.’ When embarking on a round of quantitive easing, the central bank credits itself with additional funds (no physical printing of money is required) and uses these funds to buy assets such as government bonds.

QE is often considered the last resort of a floundering economy – the bank’s typical course of action to lift a country out of recession and encourage spending and borrowing, as we have seen during the last few years in both the US and the UK, is usually to lower interest rates. When rates reach zero, or close to zero, at which point they cannot be lowered further, one of the remaining courses of action is quantitive easing – basically, creating more funds in order to increase spending when other methods have failed to do so.

Quantitative Easing: Why Now?

The Bank of England’s decision to proceed with more QE this month comes as the inflation rate remains above the target, currently set at 2%. The latest figures show inflation to be 2.8%, which, despite having fallen compared to previous months (the peak was in September 2011, when inflation reached 5.2%) have prompted the Bank to take action and roll out the new phase of asset purchases this summer. Effective immediately, the process is expected to be staggered over four months, coinciding with the arrival of the Olympics, which is also hoped to provide a welcome boost to the slow economy.

The Bank hopes that the introduction of an additional £50 million will work as expected, and prompt a continued gradual decrease in inflation.

Resources

Milliken, D., Egenter, S. Ailing Britain’s central bank turns money taps back on. (2012). Rueters. Accessed July 10, 2012.

Bank of England. Overview of the inflation report. and Bank of England maintains Bank Rate at 0.5% and increases size of Asset Purchase Programme by £50 billion to £375 billion. (2012). Accessed July 10, 2012.

Saphir, A. Top Fed officials set table for more U.S. easing. (2012). Reuters. Accessed July 10, 2012.

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