Britain has officially started quantitative easing – effectively printing money – as a way of trying to pull the UK economy out of recession.
The new money will be used by the Bank of England to buy back government bonds, held as long-term investments by banks as well as institutions such as life assurance companies and pension funds. The hope is that money will then get lent to businesses or people wanting to buy homes. The UK central bank’s governor, Mervyn King, and his fellow policymakers will have up to 75 billion pounds – just over 80 billion euros – to spend. The bank has turned to these so-called unconventional methods to thaw the credit freeze after cutting interest rates failed to increase borrowing. The benchmark interest rate in the UK is now at a record low of 0.5 percent. Commercial banks, having suffered huge losses on bad loans, are now reluctant to lend to anyone even those who are likely to repay the money they have borrowed. There is no guarantee this will work. The banks could decide to hang on to the money they get from selling bonds, rather than use it to increase lending. The lack of loans continues to drag down the UK property market. Earlier this week new figures from the Royal Institution of Chartered Surveyors showed home sales fell to the lowest in over 30 years. And in another sign of the deepening recession, Britain’s trade deficit widened by more than expected in January. Exports to countries outside the European Union plummeted by 16 percent.