Effects of Quantitative Easing in the UK

Last month, the Bank of England announced plans to £75bn quantitative easing (QE) to be introduced into the UK economy. Belsize look at the likely effects this will have on the UK economy. On the positive side, pumping £75m cash into the economy should help to stimulate the recovery. Introducing more money into the system should serve to increase consumer spending and stimulate the county’s growth and GDP. The announcement has immediately had an effect on the stock market which rose 3.7 percent the following day. Previous experience suggests that the Pound is expected to weaken as the effects of QE come into effect over the next few months. This is positive news for exporters but negative on the whole for importers. If QE works as planned, the stock market revival should counter and prevent any significant devaluation of the Pound.

The Bank of England have previously cited QE as being used as a “last resort”. This is because introducing more money into the economy (effectively printing more money) will give rise to inflation combined with the aforementioned currency devaluation. The two combined give rise to a double whammy as it will cost more to import goods into the UK, leading to further inflation. Savers will be hardest hit because the purchasing power of their money will be reduced as inflation kicks in. Pension funds will also be hit as QE is likely to lead to lower annuity rates.