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The Bank of England set to explain quantitative easing to the public

Charlie Bean, deputy governor of the Bank of England, will this week embark upon a whistlestop tour of the UK during which time he will seek to explain the intricacies of quantitative easing and other financial strategies used by the Bank of England. The headlines, in relation to quantitative easing, have contained figures such as £125 billion and given the impression that money is being created to try and reinvigorate the UK economy.

However, quantitative easing is the process by which the Bank of England issues further liquidity in exchange for government rated or similar bonds which can then be resold in the future. The Bank of England currently holds around £125 billion worth of these bonds and as when the UK economy shows signs of life, is highly likely to resell these back into the marketplace. However, the more money the UK government and the Bank of England pump into the system the more chance that inflation will come back to life in the short to medium term.

This is a situation which will need careful handling because do you increase interest rates to slow down the growth of inflation, and economy? Or do you move to a policy of quantitative tightening, which will see the bonds acquired by the Bank of England resold back into the marketplace, and the liquidity tap turned off for corporate UK?

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