The coronavirus pandemic has been a massive blow to the economy, hitting jobs and businesses hard. The Bank of England is to pump another £150bn into the UK economy to help it recover, in another round of “quantitative easing”.
What is quantitative easing meant to do?
When economic times are hard, people worry about losing their jobs, and grow wary about spending money. Businesses see their customers staying away. They start losing money, and may have to lay off workers.
Normally, the Bank of England would try to make things better by cutting interest rates.
Lower rates mean you get less interest on your savings, so it’s less attractive to save money than to spend it. And lower interest rates make it cheaper to borrow money, so it’s easier to buy a new house, or car, or expand your business.
People buying things and businesses investing helps the economy stay healthy, protecting jobs.
But interest rates are currently just above zero – there’s no scope for another big cut.
That’s why the Bank has turned to quantitative easing (QE). It’s another way to encourage spending and investment.
How does QE work?
The Bank of England is in charge of the UK’s money supply – how much money is in circulation in the economy.
That means it can create new money electronically. That’s why QE is sometimes described as “printing money”, but in fact no new physical bank notes are created.
The Bank spends most of this money buying government bonds.
Government bonds are a type of investment where you lend money to the government. In return, it promises to pay back a certain sum of money in the future, as well as interest in the meantime.
Buying billions of pounds’ worth of bonds pushes the price up: when demand for anything increases, the price usually goes up too.
Many interest rates on loans offered by banks to businesses and individuals are affected by the price of government bonds.
If those government bond prices go up, the interest rates on those loans should go down – making it easier for people to borrow and spend money.