Quantitative Pleasing

In recent months, even years, you have undoubtedly seen headlines regarding the government’s plans for economic recovery. If you have, you have probably encountered the phrase ‘quantitative easing’ or QE. This involves considerable sums of money being pumped into the economy.

UK Government borrowing soared after the financial credit crunch in 2008 by using significant amounts of money to support businesses and workers e.g. the banking industry. Again, in 2020, the UK government’s borrowing increased even further due to the COVID19 pandemic and the introduction of the furlough scheme. This was a vital lifeline for millions of people and businesses, as it allowed them to continue to pay their bills whilst they were unable to work and trade. The government also provided loans and grants to businesses that were particularly impacted by the lockdowns, such as pubs and restaurants. While this economic support helped many to keep their heads above water, it came at a significant cost. In order to help cover the cost of the government’s policies, the Bank of England increased QE to help ease the burden.

QE essentially involves the Bank of England buying government debt.

The Bank of England is responsible for the amount of money that’s in the UK economy at any given time. One of the main benefits of this is that it can increase or decrease the amount of money in circulation, depending on what is needed. Typically, when the government needs to raise money, it sells bonds known as gilts. These bonds promise to repay the bearer the value of the original bond, plus interest. Essentially, QE involves the Bank of England buying up a large amount of these bonds. As a result of this increased demand, the price of the bonds rise which, in turn, causes the interest rate that these bonds pay to fall. This means that the interest rates from lenders is reduced, making it cheaper for people and businesses to borrow money.

Furthermore, if the price of bonds rise and the interest they earn falls, it makes them a less attractive prospect for private investors. This encourages the purchase of alternative assets such as property and shares which can then lead to a rise in their value.

This can be good news for homeowners but bad for those looking to get onto the housing ladder. In recent months the UK housing market has undergone a ‘mini-boom.’ This outcome has also made it difficult for younger people to take their first step onto the property ladder without additional help e.g. the bank of mum and dad.

Whilst the short-term effects of QE have clearly been pleasing for some, there remains debate over the full long term impact on the economy at large.

Although every effort has been made to ensure that the information provided in this article is accurate and correct, the information provided does not constitute any form of financial advice. We recommend that you take financial advice before making any financial decisions.