Economic Crash Course
These days, it can seem like you need a degree in economics just to keep up with what’s affecting small businesses. We’ll try and take some of the smoke and mirrors away from the buzzwords in the news. First up – Quantitative Easing. .
The Bank of England’s normal way of getting people to spend more money is reducing interest rates. The last reduction of 0.5% (down to 0.5%) would’ve put around £40 per month in the pockets of someone with a £100,000 mortgage. But with only another half percent to go before interest rates are absolute zero, something else was needed to get people spending again. Hence Quantitative Easing (QE). You’ve probably heard about it in the news but what is it and how is it supposed to work?
Quantitative Easing sounds more complicated than it is. It is ‘quantitative’ because it relates to releasing a quantity of money, and it is ‘easing’ because it takes the pressure off banks in terms of holding reserves of money.
- To implement QE the Bank of England is going to buy assets such as Government bonds (loans to the Government that are already in existence and being traded on the open market) from organisations, such as banks, that hold them at the moment. And yes, the Bank of England will be creating money ‘out of thin air’ to do this.
QE has been called ‘printing money’ but the printing presses won’t necessarily be turning out new notes. It will all be done electronically, but new money is still being created to buy the bonds. On this occasion, to the tune of £75 billion.
- The banks will then be holding increased amounts of cash in their reserves, which means they can lend more; the amount a bank lends has traditionally been linked to the amount they hold in their coffers.
- If it works, credit will be made available for business growth once more, having a direct effect on employment, confidence and ultimately people’s spending. Which in turn means SMEs (the back bone of the UK economy) can start planning and investing for the future and growth. If it doesn’t, it’s back to the drawing board.
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