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Ask Citywire: Quantitative easing part II

The US has launched the second round of quantitative easing, or QEII, and the UK is still pondering whether it should follow suit. But what is it and how does it work?


But the currency could fall again if it looks like the UK will do more to stimulate the economy as that suggests interest rate rises are a dim and distant prospect, making sterling unattractive relative to the currencies in countries where rates are rising.

Most observers say the key is that government and the BoE stay alert to changing conditions and reverse the policy swiftly when needed.

The OECD has warned that withdrawing the stimlus poses a significat risk to global markets.

So why are we doing it again?

Because policymakers say there is no alternative way to stimulate the economy given the high levels of debt and because central banks fear deflation much more than they fear inflation.

King has repeatedly said it is easy to turn the tap off if it looks like inflation is getting out of hand. What that means in practice is that inflation will go unchallenged until the economy is clear stable again. At that point interest rates will be lifted to rein in price growth.

Read our guide to how QE2 will affect your investments. 

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5 comments so far. Why not have your say?

John Thorley

Nov 08, 2010 at 14:51

Most exporters are also importers so exchange rate changes have effects in both directions. Inflation will sky rocket if we print more money. Printing money has never solved anything.

People with savings will not spend them just because the B of Eng want them to. With returns to cash so low they'll just stop spending. That's how they got the savings in the first place.

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Nov 08, 2010 at 16:49

Control of the money supply by a central bank using quantitative easing in "open market operations" has come to mean in layman's terms. Printing bank notes.

Of course in reality this is a misnomer and over-simplification. Since most money is now in the form of electronic records no actual printing takes place. The central banks simply make bargains with clearing banks to buy certain assets. (usually Govt. bonds) Payment is in the form of an "electronic" credit. Since it cannot in theory make credits without corresponding debits to its own account the central bank must record that the total amount of money in circulation has increased and by how much.

However the true money supply only increases when specific electronic money is lent to someone who then exchanges it for something real or tangible.

So it may be fair to say that the amount of quantitative easing will ultimately be decided by the number of borrowers who step forward with requests for loans.

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Jeremy Bosk

Nov 09, 2010 at 00:58

People who save more when interest rates are low are missing a trick. They should invest in short term corporate bonds, preference shares, PIBs or better yet in high yielding equities. If any of those things is too much like hard work then buy non-perishable consumer necessities against the long term threat of inflation. Baked beans and soap can only become more expensive in the longer term.

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Gerald Arbage

Nov 22, 2010 at 20:32

"Quantitative easing - often referrred to as printing money - was first introduced in Japan back in 2000"


I suggest you guys take a long hard look at this Wikipedia page on Hyperinflation. It contains a long list of countries that printed money before Japan did in 2000. The difference is that Japans economy and currency didn't crash.

I am not saying that 'quantative easing' will cause hyperinflation, nor am I saying it won't. I have no idea what it's long term effect will be. But saying that Japan 'invented' the printing of money is just so plain wrong I could not resist to post.

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Gerald Arbage

Nov 22, 2010 at 20:32

Link to Wikipedia page on Hyperinflation:

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