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Quantitative Easing

The Bank of England yesterday announced another round of quantitative easing (QE).  This is where the central bank creates new money (either via the printing press or by increasing bank reserves on deposit at the central bank) and uses that newly-created money to buy long-dated government bonds.  When I took monetary economics as a student, this was known as monetising the government debt.

Why does the central bank do this?  The main stated objective is to lower long-run interest rates so as to stimulate borrowing and investment.  However, banks are still repairing their balance sheets and businesses are reluctant to borrow so it is doubtful that QE will have the desired effect.  The main unstated objective may be to drive down sterling so as to help British exporters - notably sterling is now at 15-month low against the dollar. 

My fear with QE is that it will result in higher inflation (RPI is currently at 5.2%).  This, of course, reduces (in real terms) the amount the government and other major borrowers have to repay on their debt.  It also reduces my real income!

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