What is Quantitative Easing?

Two great articles from the BBC on Quantitative easing:

A cartoon guide to Quantitative Easing

Q&A - Quantitative Easing

Explanation
The Bank of England is not a high street bank. It is like a money shop that buys and sells money from banks and financial institutions on behalf of the UK Government.

It can lower the price of that money by lowering its ‘official bank rate’ (the rate of interest or “price” that the BoE charges for money). This of course makes it cheaper form banks to ‘buy’ money from the BoE.

The Government has been lowering the ‘official bank rate’ in the hope that the banks would come in, ‘buy’ the ‘cheap money’, and lend it to customers and business.

The customers and businesses would buy products with this ‘cheap money’, which would increase aggregate demand, reduce unemployment and increase the value of products produced in the UK (increase the GDP).

However, even at a 300 year low rate of 0.5%, the demand for the ‘cheap money’ has not increased, so the UK Government has now decided to use “Quantitative Easing” to try and get the UK economy out of recession.

Quantitative easing is a Government policy which allows the BoE to simply print money, and feed it into the UK economy in special ways – by
• Giving some to the Government in return for Government Bonds
• Giving some to banks and other financial institutions in return for bank assets
• Loaning some to banks and other financial institutions at a low rate of interest.