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article imageUK to Begin Quantitative Easing

By Tim Neale     Mar 6, 2009 in World
The Bank of England, The UK’s central bank, cut interest rates to 0.5 percent yesterday. This is the sixth month in a row that the Bank has cut rates. Interest rates are now at the lowest ever in the Bank’s 315-year history.
The Governor of the Bank of England, Mervyn King announced that quantitative easing would start next week. The Bank will add an extra GBP75 billion (US$100 billion) to its books then use this cash to buy government and corporate securities from commercial banks. It hopes that these banks will then invest or loan this cash back into the economy.
The UK economy is in uncharted waters. No one seems sure if this latest fix will be any more effective than the other fixes applied in the last 12 months. This apparently includes the Governor of the Bank of England. Yesterday Mr King told the BBC:
"Nothing in life is ever certain, but these measures we think will work in the long-term.
"I don't know how long it will take, much depends on the situation in the rest of the world. But if countries work together, these measures will I believe eventually work.
Some say “quantitative easing” is just a fancy way of describing printing money. However, in modern banking, actually printing the money is unnecessary; the bank simply credits itself with the cash electronically.
Quantitative easing was used by Japan in the early 2000s as a last ditch measure to end deflation. Ben Bernanke, chairman of the Federal Reserve, has recently been introduced it to the US in an attempt to unblock credit markets there.
However, the UK’s foray is enormous in comparison. The Bank of England has permission to create another GBP75 billion ($100 billion) in cash on top of that it intends to conjure up next week. This is triples the reserves commercial bank hold at there, The total of GBP150 billion ($200 billion) represents 10 percent of the UK’s GDP.
The Chancellor of the Exchequer (finance minister) Alistair Darling said increasing the supply of money was "absolutely essential" in order for the UK to recover from the recession.
However, it is a very high-risk policy, and a measure of the panic in the UK’s financial establishment that it is being implemented at all.
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