Bank of England creates a lot of money

Since the global financial crisis , both the Bank of England and the Federal Reserve has used quantitative easing ( QE ) to try to revive consumer spending and economic growth. In the UK, the Bank of England began "asset purchases" in January 2009.

Banks have so far committed a total of £ 375bn to QE, while in September the Fed said it will spend over $ 40 billion ( £ 25 billion ) per month. This is on top of $ 2.3tn Fed QE has been put in since 2008. At Bank meeting in early February, Governor Sir Mervyn King backed more action to increase the number of purchases over £ 375bn QE but were outvoted by his colleagues.

What is quantitative easing ?

Typically, central banks try to increase the amount of lending and economic activity indirectly, by cutting interest rates. Lower interest rates encourage people to spend, not save. But when interest rates can go no lower, the only option is for the central banks to pump money into the economy directly. It is quantitative easing (QE).

How central banks do this is by buying assets - usually government bonds - using money that was created out of thin air. Such institutions sell bonds (either commercial banks or other financial businesses such as insurance companies) it will have a "new" money in their accounts, which then increases the money supply.

Tried first by the central bank in Japan out of deflation period after the collapse of the asset bubble in the 1990s. Before 2009, QE has never been tried before in the UK .

Does it print money ?

These days should the Bank of England does not actually print money - it's all done electronically. However, economists still argue that QE is the same principle as the printing of money because it is a deliberate expansion of central bank balance sheet and the monetary base.

How does it work ?

Under QE the central bank purchases of government bonds from private sector companies or agencies, usually insurance companies, pension funds and banks High Street.

This increases the demand for government bonds pushed up the value of them, thus making them more expensive to buy, so they become less attractive investment.

This means that companies that sell bonds may use the funds to invest in other companies or lend to individuals, rather than buying more bonds.

The hope is that the banks, pension funds and insurance companies are now more enthusiastic about lending to companies and individuals, they charge interest rates fall , so that more money is spent and the economy is driven. Source : bbc.co.uk

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Ditulis oleh William Perkasa pada tanggal Nov 27, 2013