Quantitative Easing

6th March, 2009

This technical phrase has put an even bigger spring in my step this morning. What, I hear you cry, in the name of God is quantitative easing (QE) and why should it make anyone happy?

This is when interest rates are so low that their further reduction has little effect on getting the economy going again. A central bank can decide to inject money directly into the economy by buying assets (normally government bonds). The sellers of these assets can then use they money they receive to spend on other investments or lend. You will hear a lot of economists talk about ‘policy tool boxes’. Well, this is the huge spanner that is rarely used and is only taken out when the situation is really bad. The last time that it was widely used was after the Great Crash of 1929 and by Japan in the 1990s.

It was used again yesterday. The Bank of England injected £75 billion into the UK economy. The Chancellor of the Exchequer has earmarked another £75 billion if this does not work. When authorising it the Governor of the Central bank was typically under stated when he said “In these highly uncertain times, there are merits to stimulating the economy through a variety of different channels”. There is a clear risk in all of this. This huge amount of money could cause inflation. Vince Cable, the Liberal Democrat MP, has already identified the risk of a return to ‘boom and bust’ economics. The Bank of England will track this in quarterly reports.

Why is this good news for us? Firstly, the UK is a key export market. The objective of QE is to increase spending in the UK by +5%. This could be great news for us. Secondly, it is another clear sign that some politicians recognise the scale of the challenge facing us and are willing to throw out the rule book and write a new one. The ECB should follow this example.