Citywire for Financial Professionals
Stay connected:

View the article online at http://citywire.co.uk/money/article/a531349

QE2: what it means for you and your money

We explain what the Bank of England's next round of quantitative easing (QE2) – the posh term for printing money – means for your finances.

 
QE2: what it means for you and your money

The Bank of England has announced plans to embark upon a second round of 'quantitative easing' – the posh name for printing money – by pumping another £75 billion into the economy.

But what does this mean for you and your finances? 

What is QE2?

The Bank of England has resorted to another round of quantitative easing (QE) because with interest rates at an all-time low of 0.5% it has no other way of boosting the flagging economy.

New data last week showed the UK’s economy grew even slower than expected in the second quarter of this year – with gross domestic product (GDP) growth dropping to just 0.1%. 

QE is designed to inject cash into the economy and cut long-term borrowing rates. The Bank creates money electronically and uses it to buy government bonds (gilts) and corporate debt from financial firms such as banks and insurance companies.

Bank of England governor Mervyn King hopes this supply of new money will encourage the banks to lend it on to businesses and thus help the economy to grow.

By pushing up the price of gilts, QE also depresses the yield (or income) from these investments. As the yield on 10-year government bonds is used to measure long-term interest rates, the hope is that by lowering the yield it will lower the cost of long-term borrowing. In theory this should increase businesses’ confidence about planning and investing in the future.

King launched QE in March 2009 as the UK struggled to clamber out of the credit crunch, and he expanded the programme later that year. With the latest increase the total spent on quantitative easing will rise to a staggering £275 billion.

Although King believes the first round of QE was a success in helping the economy, it has been hugely controversial as it is has coincided with inflation (as measured by the consumer price index) rising to 4.5%, way ahead of the Bank’s 2% target.

The governor argues that the rise in inflation has been caused by temporary external factors (such as high commodity prices) and that it will fall next year. Critics say that QE is inherently inflationary and that the Bank of England’s inflation forecasting record is poor. Some even accuse the governor of deliberately stoking inflation in order to help the government cut the real value of the country’s debt pile.

Meanwhile, in a sign that QE has not been a total success, chancellor George Osborne has said he is considering other ways to get lending through to small and medium-sized businesses that have complained bitterly that banks are not lending to them.

How will QE2 affect your savings?

High inflation is a saver’s worst nightmare as it erodes the purchasing value of your money. If QE2 does cause inflation to soar it will only mean more bad news for savers – who, with interest rates at a record low, are already struggling to protect their money against the rising cost of living.

Sign in / register to view full article on one page

17 comments so far. Why not have your say?

Anonymous 1 needed this 'off the record'

Oct 11, 2011 at 06:56

Save England, don't buy Govt. Ponzi Bonds...... the Govt. has to survive on what it taxes, as Dave has basically said, don't spend more than you earn, if individuals can do it so can the Govt. Perhaps then we might start to have sustainable growth.... not the artificial chaos and manipulation that we have at the moment ........

report this

Chris McDaniel

Oct 11, 2011 at 08:08

Keep printing the fiat, Lads, and you will find yourselves facing the guillotine. Both sides of the Atlantic are led by leeches who have no courage for facing the spectre of simple truth, which is, one cannot solve a debt crisis by taking on even more debt. The folks at home will soon enough tire of this madness. The oppressed learn slowly, but surely.

report this

Alan Tonks

Oct 11, 2011 at 09:18

I am sure electricity was used for mental disorders, so Mervyn King instead of using it electronically for issuing funny money yet again. He should be given electric shock therapy to bring him back to reality, but for him I think it is far too late.

report this

Andrew Stevenson

Oct 11, 2011 at 12:10

Sir Mervyn King, Sir Victor Blank, Sir Fred Goodwin, any more names for the tumbril......?

report this

Nigel gardiner

Oct 11, 2011 at 14:00

£75bn cash injection is just the beginning: Bank of England economist warns more quantitative easing will be needed

He then says in a recent article

Dr Weale said: ‘Obviously there is UNCERTAINTY about the exact impact and equally WE DONT KNOW whether the impact in the future will be similar to what WE THINK IT WAS in the past.’

I have not heard anyone suggesting that quantitative easing actually inhibits the growth of the economy, that it fails to provide support.’

( WELL I WOULD SUGGEST HE CLEARS HIS EARS OUT)

report this

Ian Craig

Oct 11, 2011 at 14:16

QE this time: £75 billion / 60 million people = £1250 per person

Total QE: £275 billion / 60 million people = £4583 per person

report this

Whatisname

Oct 11, 2011 at 14:23

You save all your life and pay into pensions (private not public service) and you end up with a pittance which will be just enough to ensure you do not get any means tested benefits. The government under Gorden and now "call me Dave" is making sure that anyone stupid enough to save for retirement is hammered. As if trying to find someone to invest your pension with, who was not going to ensure it fell in value, while paying them massive bonuses was not hard enough already.

Thanks SIR Mervyn, I am sure your pension is OK.

report this

Dave R

Oct 11, 2011 at 14:35

I do not quite understand quantitative easing can somebody pleaase explain it to me

The Bank of Endland buys Government Bonds (Glits) What does the BOE do with them once they have purchased them do they hold them or do the cancel the bonds bacause in effect they have no paid for them?

The BOE buys the gilts with printed money from the Banks and other financial instututions etc But what do the banks do with the cash recieved from the sale of these gilts. Do they then do they go back into the market and rebuy more bonds etc, so as to maintain the reserves as they are suposed to do under the Basle 111 agrement Or do the lend out the cash recieved to samll businesses and mortgages etc?

report this

Chris McDaniel

Oct 11, 2011 at 15:24

QE means money printing. The tricky shenanigans, the ins and outs, the fine points of just how they print it means nothing at all. All you need to know about QE, by any name, is QE means inflation on the way and that your currency is on a glidepath to complete collapse. It means the cowardly political/banking class is out of ideas (except to fight mounting debt by taking on more mounting debt, which they seem to believe is genius). It means that very soon, the people who've been living by spending other people's money will discover they are the other people. It means banks will survive and you will not. It means those stealing yours and your great-grandchildrens' wealth are buying homes in faraway places to live our their lives and they have their travel plans already made. And I think in the end it means the guillotine for those who do not somehow manage to escape, while you stand in the breadline.

report this

Whatisname

Oct 11, 2011 at 15:30

The banks use QE to keep paying their bonuses. Does anyone think they will have any other use for it?

report this

Richard White

Oct 11, 2011 at 18:19

Quantitative Easing-A dishonest name for a dishonest activity.

In short,a disgrace.

report this

Woodberry

Oct 11, 2011 at 19:27

If the Bank of England buys bonds to the value of £75 billion and the commercial banks dealers charge say 1% for making the deal and have a spread of, say, 1% they will take 2% of 75 billion which is £1.5 billion. Then they will take credit for that amount of extra business for the bank and award themselves that £1.5 billion as bonuses. Could someone explain to me where I am wrong in this reasoning?

report this

Marcus Palsson

Oct 11, 2011 at 20:04

"this supply of new money will encourage the banks to lend it on to businesses and thus help the economy to grow."

Basically means the banks can do whatever they want with the new money. They do not have to lend it to businesses! Same was with QE in the US 2008!

Also, BOE buys bonds = debt, debt created by who? The banks! Normal high street banks can also print money and does so when someone asks for a loan. A loan becomes a debt, maybe a foreclosure, the bank wont get this money back. Tax payer comes to the rescue!

Visit positive money's website and read what the banks are actually doing to YOUR money.

report this

Roberthorse

Oct 16, 2011 at 10:33

So fiat money is thrown at banks which trade for their own profit and with no real control on what they do with it? Seems like a massive and blind act of faith in the corrupt and self-seeking world we now live in. Also, I can't believe that some of it isn't finding it's way into their back pockets as it did in our Parliament and, according to media reports [which have mysteriously died out] is still doing in the European parliament.

report this

clive chafer

Oct 16, 2011 at 10:40

Words fail me. We live in a democracy, don't we? Did our people ask for Weimar -style money printing leading to rapid inflation? I don't think so. Is this the same democracy in action that we boast about to the rest of the world? Working well, ain't it!

report this

dan cahill

Oct 16, 2011 at 13:14

QE is akin to plundering an amount from all who have cash or are on fixed incomes. We accused Robert Mugabe of doing this but now our leaders are following suit. How will it all end?

report this

Cynic too

Oct 17, 2011 at 11:21

Anybody watch Russian and China TV on the box last night? wherein it was reported that almost 1,000 cities around the world were experiencing civil commotion, riots or protests about the corrupt capitalist system and the real potential for it to self destruct.

Why has the BBC, CNN, ITV ...........not given more proper and factual prominence to this news? - is global anarchy that serious a real threat to us all?

It is claimed by some that just 1% of the world's richest' control the world's economy - so are these the only people that are gaining from this ridiculous money printing and were they the recipients of all the money that has disappeared and for which nobody has been held accountable and punished?

report this

leave a comment

Please sign in here or register here to comment. It is free to register and only takes a minute or two.

News sponsored by:

The Citywire Guide to Investment Trusts


In this guide to investment trusts, produced in association with Aberdeen Asset Management, we spoke to many of the leading experts in the field to find out more.

Watch Now

Today's articles

Tools from Citywire Money

From the Forums

+ Start a new discussion

Weekly email from The Lolly

Get simple, easy ways to make more from your money. Just enter your email address below

An error occured while subscribing your email. Please try again later.

Thank you for registering for your weekly newsletter from The Lolly.

Keep an eye out for us in your inbox, and please add noreply@emails.citywire.co.uk to your safe senders list so we don't get junked.

Sorry, this link is not
quite ready yet