BoE looking to implement quantitative easing

In a bid to boost the economy and fight off the threat of deflation, the Bank of England is looking to start increasing the supply of money via a measure called quantitative easing.

Quantitative easing is a process whereby the Treasury injects funds into the financial system to ease pressure on banks by giving them extra capital. The aim is to increase lending levels in commercial banks.

According to sources close to the Bank, the measures could be introduced within days.

This month’s Monetary Policy Committee (MPC) meeting minutes revealed that the decision to introduce quantitative easing was unanimously agreed by its nine-members.

The minutes also revealed that the MPC voted 8-1 to cut interest rates by 0.5% to 1% this month.

Aggressive cuts to the base rate have been made since October due to fears over inflationary pressure. However many economists now believe that lowering interest rates will not help bring the economy out of recession.

Many business groups, including the Federation of Small Businesses, recently said rate cuts were not having the desired affect since commercial banks are still reluctant to lend.

Official figures released yesterday from the Office for National Statistics (ONS) revealed that consumer price inflation (CPI) fell in January to an annual rate of 3% from 3.1% the previous month.

With inflation becoming less of a threat to the economy, deflation is becoming a worry.

A short period of deflation (where prices fall rather than increase) could be a serious threat to the economy because it deters consumers and businesses from spending in expectation of falling prices.

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