Quantitative Easing Explained: Pros and cons

The Bank of England will expand its programme of money creation by £25bn over the next three months, to boost Britain’s recession hit economy.

The Bank buy billions of banks of UK government bonds, or gilts, from financial institutions in the hope the money spent will be invested in the wider economy. With no room to cut rates, the Bank must instead turn to direct means of influencing the money supply.

Whether it will succeed is another question, but Thursday’s announcement means it has thrown its weight behind this new policy of quantitative easing, with more weight and vigour than any other central bank in history.

So how does it work: The Bank lends out money in return for collateral to instill confidence in the market and provide cash with which to trade. One of the Pro’s for this is the system does not meddle directly with monetary policy, so does not interfere with interest rate decisions, The Con for this it does not solve the credit crunch, in which banks are unwilling to lend cash at all.

The bank could also buy gilts (Government debt) or assets, however there is Pro’s and Cons to these as well. Why not take a look at them at telegraph.co.uk. What do you think about the BOE money creation?