Q&A: Will quantitative easing work?

By THIS IS MONEY
Updated:

 

Quantitative easing

What is quantitative easing?

Otherwise known as 'printing money', it is where the Bank of England floods the economy with new cash in the hope of boosting spending.

The Bank will not actually print new £10, £20 and £50 notes but electronically create the money, putting it into banks in the hope they will lend it to cash-starved businesses and consumers struggling to get affordable credit.

Why is it needed?

To stop the economic crisis triggering deflation. Economies with deflation deteriorate rapidly because people refuse to spend money knowing goods will fall in value.

People's wages fall, so their spending power to repay debt declines.

How does it happen?

The Bank will buy assets like gilts from commercial banks. To pay for them, it will simply increase the balance of their account held at the Bank of England.

All major banks have such accounts. They can then draw on them and lend the money out.

Who decides to start it?

Bank Governor Mervyn King. But only after getting the approval of his interest ratesetting monetary policy committee, which is sitting today. It will vote every month on whether to continue the process.

What are the risks?

Hyperinflation. The flood of money, unless extremely carefully controlled, could drive up prices massively.

This happened when Germany printed money between the First and Second World Wars and has happened in Zimbabwe under Robert Mugabe, where inflation is running at more than 100,000%.

Will that happen here?

Highly unlikely. If inflation runs at a steady 2% - the official long-term inflation target - the Bank will stop the process.

Will it work?

Only time will tell. The Japanese tried quantitative easing with almost no effect. However, most experts think it will have an impact if it is implemented rapidly.

- Expert view: Will quantitative easing work?

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