Bank of England to introduce quantitative easing

| March 5, 2009 | 0 Comments

Following the Bank of England’s decision to cut interest rates today to a fresh low of 0.5%, it was also announced that the Bank is proceeding with quantitative easing (also known as printing money) - 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 and to stimulate the economy.

Earlier today, Chancellor Alistair Darling gave permission for £75 billion of new money to be created over three months, however permission has been granted to extend this to up to £150 billion.

Mr Darling said the process was “absolutely essential” in order for the UK to recover from the recession.

This approach is a first for the UK but has been used by the US in the current recession and was implemented by Japan when it faced deflation (a period of falling prices).

According to Mervyn King, the Bank of England’s Governor, quantitative easing is also about injecting money into the wider system, not just the banks.

He said the measures will “eventually work” but said it was unknown how long it would take to have an impact.

However, the stock market failed to respond positively to the announcement of the interest rate cut and quantitative easing as the FTSE 100 index was down 3.1% at 3532 points, while sterling fell against the dollar to $1.4090.

Earlier this week, the FTSE closed at a 6-year low as bad news continues to wreak havoc throughout the world.

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