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Quantitative easing arrives
The Bank of England announced another cut in the interest rate to 0.5%. The bank’s most crucial decision though has been its intention to add £75 billion in to the UK’s economy through “quantitative easing” which is another way to describe printing money.
The Bank of England is close to having such a low rating that it will not be able to fully function as a bank as it can not push its rate to below zero. The Governor of the Bank of England, Mervyn King, announced that it would immediately start a period of three months QE and hope it will jump start the economy and avoid a full blown depression.
The bank will begin buying corporate bonds and treasury gilt-edged stock, “gilts” from commercial banks. It will pay for them by electronically created cash which will be paid to the banks and credited to their Bank of England accounts, the banks should be able to make new loans to businesses and consumers backed by the increased funding. The bank will need to monitor the types of assets it buys and ensure they are performing well in order for the policy to be most effective.
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