The Bank of England to the rescue?

Will the Bank of England’s latest round of Quantitative Easing (QE) be effective at boosting the UK’s economy, or will it prove to be a hard pill to swallow?

Easing

The Old Lady ... 
Is this Armageddon?

Sir Mervyn King, the Governor of the Bank of England, is quoted as saying that the world faces, “the most serious financial crisis ever.”

So at first glance, the decision of the Bank of England to ‘print’ another £75 billion is very good news for the UK economy, but will it turn out to be the panacea that the country needs to drive growth?

It would appear that by buying that amount of gilts and other treasury bonds (given the markets were expecting no more than £50 billion to be made available this time around), it will release these funds into the banking system, which will in turn release those same funds to the very businesses that have been starved of working capital for the past few years. If this does take place then, yes, it should prove a great fillip to the economy as a whole.

Will the banks really lend more?

However, our banks’ track record has not been good in this regard. Previous QE, amounting to over £200 billion, has not exactly seen the banks falling over themselves to lend. Indeed, you would be forgiven for thinking that they had actually just hoarded the cash in their balance sheets.

In their defence, they tell us that businesses are in fact hoarding cash and are not seeking additional loan finance.

... Inflation hurts

Inflation vs. stagflation - which is worse?
Another consequence of QE is that it condemns the bank to admitting that its brief of maintaining inflation at 2% - which it has failed to do for several quarters - cannot be achieved. The previous rounds of QE have, in fact, increased the UK rate of inflation by approximately 1.5%, so this latest bonanza from the Old Lady can only make matters worse in this regard.
The cumulative effect of this is that with inflation continuing to rise, the average saver is going to be worse off, as they struggle to find any savings medium that will offer them a ‘real’ return.

 Flow Chart

With current inflation courting 5%, those savers would see the purchasing power of their nest-eggs halve in about 14 years. This sobering thought is bound to reduce the likelihood of them freely using any disposable income, thus continuing the reduction in public spending, to the detriment of the economy as a whole.

Which way will the Bank of England jump?
Perhaps Sir Mervyn King’s logic is that it would be far better to ignore the threat of stoking the inflationary demon, if that can help us avoid the even worse devil of deflation or worse still stagflation. All of this means that he is between a rock and a hard place, strategically.

The view is we have not seen the end of the bank’s largesse, with perhaps another £100 billion being primed to hit the printing presses soon.

Only history will tell us if this brave QE policy will truly boost our flagging economy to the degree, he and, we, all hope.

It is important always to seek independent financial advice before making any decision regarding your finances. For further information, please contact SDB Strategic Planners Ltd. The value of investments is not guaranteed; you may get back less than you put in.

NOTHING CONTAINED IN THE ARTICLE SHOULD BE CONSIDERED AS GIVING INDIVIDUAL FINANCIAL ADVICE. THE VALUE OF INVESTMENTS IS NOT GUARANTEED AND WILL FLUCTUATE. YOU MAY GET BACK LESS THAN YOU INVEST.

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