Quantitative easing essentially increases the money supply by
flooding financial institutions with capital, in an effort to promote increased
lending and liquidity. It is a government monetary policy whereby government
securities such as bonds or other securities are bought from the market.
Quantitative easing is a drastic measure and can often be looked
at a last resort in the tackling of financial crisis and market downturns.
While quantitative easing can give economies that kick start
injection needed to get them functioning again, it is important to be aware of
the associated negative externalities or knock on effects. Despite the extra
money in the economy, the amount of goods and services for sale remains
unaltered and this inevitably results in
higher prices and increased inflation.
The IMF believe that the quantitative easing measures that were
adopted by central banks since 2000 have resulted in a reduction of systematic risks
following the collapse of the Lehman Brothers.
Here is an insight into the quantitative easing measures taken in
the UK:
In March 2009 the Bank of England pumped £75bn in the economy following dramatic a series of austerity
measures aimed at easing the credit crunch and encouraging the banks to lend again, that essentially didn’t work.
This was then reviewed later that year and further expanded to £200bn.
A
continued strain on lending and lack of liquidity in the UK market lead to
further QE measures in October 2011, the Bank announced a further £75bn to be
injected into the economy.
Most
recently, February 2012, this was once again extended by £50bn, bring the US to
a total quantitative easing programme of £325 billion, however the Bank
governor Mervyn King recently announced that he currently has no plans for any
further quantitative easing.
