Unit 4 Macro: Bank analyses the impact of QE

The Bank of England has published a report analysing the impact of the £200 billion programme of quantitative easing on the UK economy. The strategy started in the spring of 2009 (coinciding with base interest rates reaching an historic low of 0.5%).

According to the BoE report (contained within their latest quarterly bulletin), the effect of asset-purchases designed to bolster the cash reserves of the banking system has see “a peak effect on the level of real GDP of between 1½ and 2% and a peak effect on annual CPI inflation of between ¾ and 1½ percentage points. QE is estimated to have had approximately an equivalent impact on inflation as a cut in Bank (interest) Rate of between 150 to 300 basis points. (1.5 - 3%) - although these estimate must be treated with a degree of caution.

£198 billion of the £200 billion asset purchase programme has involved the central bank buying gilts (government bonds) from the financial system - purchasing them injects cash or liquidity into the system and is designed to unfreeze the supply of credit hopefully flowing through to small and medium sized businesses needing finance to cover an expansion.