Quantitative Easing – A Dry Run

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Money money money: The Bank of England announced it would introduce an extra £50 billion into the economy this week Photo – David Levenson/Alamy

In context to the recent developments in the economies around the world, there is a certain preference for monetary policy to be used in order to reach the economic goals deemed necessary and pending. Central banks are looking to inject the liquidity in the markets in order to stimulate any growth that seems to be fading from the markets. Taxes and other tools of fiscal policy are slow and in recent years have been counterproductive to the needs of the hour and so monetary policy is the more efficient measure. In light of this, the BoE recently published results of its recent round of QE showing that the policy of government bond purchases was the best route to follow.

The report states that if such a purchase was not carried out, the recession would have been deeper and that the net effect to the economy would have had been worse. The policy was being criticised by savers and pensioners due to lower interest rates that entailed in the economy after the expansionary policy being put in place. The report further details into how the negative effects were minimised and how the positives of the policy greatly outweighed the negatives overall. The purchase was made up of £325 billion ($512.94bn) worth of asset purchase and overall the stimulus provided allowed the economy to be sustained through the harsh times. Reeling from the Global Financial Crisis of 2008, the ever looming eurozone crisis and the slowdown in the more robust BRICs economies would have put additional pressure.

Unemployment, inflation, and bankruptcies would have ensued which could have been worse for savers on their own. By putting such a measure in place, most of the effects were avoided in the end. After the success of this policy, another round of QE was done in July where £50 billion ($78.91bn) of assets will be bought until November. The Bank has defended its actions against their detractors saying that the effect on interest rates is spread over the long term interest rates and that this will not impact the regular deposit holders.

The results of this report gain more relevance based on the fact that the US is also considering a round of QE in order to boost its own slowing down growth and the results from the UK example show that the policy is successful if it is carried out properly and in a timely fashion. Even though the approach being considered is unconventional compared to past policies used, the goal is still to provide the economy with much needed liquidity and guarantee that seems to be lacking. This loss of trust and belief is mirrored in the commodity and equity markets where oil and gold have hit new highs in 4 months and the trend seems to be towards a slowing down world economy in the near future as well.

Due to this, there is a loss of confidence and a need of stimulus to quash any such sentiment. The new bond purchase is expected to be open ended which means it would not be bound by a fixed time frame allowing flexibility to the Fed of availing the option of purchase as it seems fit. By using such a measure, the Fed would be allowed the choice of spreading out the purchase over time and not be forced to give a definite number that it has to commit to from the start. After evaluating the effect of the policies over time and seeing how successful it is, the Fed can chop and change the way it wants to alter the policy. This does leave a bit of uncertainty when it comes to the markets, however, the fact that Fed wants to take an action will be a much needed positive signal required. In addition, the report by the BoE shows that the strategy has potential to be successful.

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