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March 9, 2009

New cash for lenders as quantitative easing begins

by Gill Montia

Story link: New cash for lenders as quantitative easing begins

The Bank of England will this week begin the process of quantitative easing under a £150 billion scheme designed to free up commercial and personal lending.

On Wednesday the Bank will hand over around £2 billion of newly created money to banks and other investors in return for UK Government bonds and corporate paper.

The measures have been under discussion for weeks, with economists warning that in the long-term quantitative easing runs the risk of creating serious inflationary pressures in the economy.

Some commentators also have concerns that instead of lending the new money, banks will hoard it.

On the one hand banks are being called to account for reckless lending and on the other being urged to lend more during a recession, when inevitably some businesses and individuals will face insolvency.

The delivery of the scheme also signals that interest rate cuts have not been effective in turning the economy around and may mean that the base rate has reached a nadir, at 0.5%.

The Bank will be injecting £75 billion into the economy over the coming three months, followed by a further £75 billion and more, if necessary.

The Governor of the Bank of England, Mervyn King, has stated that he does not know how long it will take to see the positive effects of quantitative easing or how many billions may be involved.

 

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