The meaning of QE2


If you're not sure of the quality of your ammunition, it's best to fire first. Some will see that as the explanation for the slightly early launch of QE2 from the Bank of England today.

Even a week ago, the betting was that the Bank would hold fire this month. Senior Bank officials have always said they would need a good reason to press the button on more money creation - that good reason being that the UK was at risk of a prolonged period of economic weakness, not a "soft patch" which might force them to reverse the policy in a few month's time.

Unfortunately, the events of the past few weeks appear to have given them that reason. They didn't need to see it in black and white, in the new quarterly forecasts that will be completed for next month's meeting.

Yesterday's GDP figures - and the mood music in the eurozone over the past week - probably sealed the deal. There is an explicit reference, in the statement, to the economy having more spare capacity - for a longer period - than previously thought.

Some say QE distorts the economy - and pushes up inflation - without doing much to increase real economic activity (more technically, it raises the cash value of GDP, but not necessarily the real volume of output.)

In a recent study, the Bank of England disagreed: it reckoned that that creating £200bn as part of QE had raised real GDP by 1.5-2%, while increasing inflation by 0.75-1.5%. If this additional £75bn works in a similar way, you could say today's move would have a roughly similar impact to maybe a 0.5-1 percentage point cut in the base rate.

Or that's the theory. In the City these Bank estimates of the impact of QE are considered pretty generous, at least when it comes to real output.

Some say that QE is all a confidence trick - albeit, an important one. What, exactly, the Bank does is less important than the fact that it is seen to be doing something.

The US comedian, Mitch Hedberg, had a line I reprised on the Today programme this morning: "My fake flowers died, because I forgot to pretend to water them."

There's something of that in the city's support for QE2. It may not do a huge amount of good, but it could seriously hit confidence if the Bank seemed to have nothing left to throw at the recovery.

On this view, the Bank needs to pretend to water the economy, even if there's less and less chance of it doing any good.

I will be interviewing Mervyn King this afternoon. I have a funny feeling he will see it differently.

Stephanie Flanders Article written by Stephanie Flanders Stephanie Flanders Former economics editor

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  • rate this

    Comment number 137.

    If QE is used to buy assets whose value declines then the Taxpayer will have to fund the difference through greater future taxes. At what point does QE become another form of public spending?

  • rate this

    Comment number 136.

    I believe banks will either sit on cash or spend in Asia therefore QE protects banks and/or pushes up inflation. I don't see how QE can work effectively if government isn't willing to take on debt.

  • rate this

    Comment number 135.

    We have to get the economy spending again, unfortunately lowering interest rates has not worked. The theory behind QE is sound, but I am not convinced it works! The banks hold onto too much of the funds and don't let it filter down to the consumer or small business' where it is needed. Its a difficult situation to be in and it wont improve until the Eurozone cleans its act up. Confidence has gone

  • rate this

    Comment number 134.

    QE3 instantly dropped the £'s value against 16 major currencies by 1%

    All imports and commodities in those currences (Oil, Gold, Food) will instantly increase by 1%+

    A calculation of GDP on a bit of paper will rise, the media cannot report the UK is in recession.

    We will have to pay this money back, this is a crime against the prudent and a saviour for the profligate.

    Sack them all

  • rate this

    Comment number 133.

    A small percentage of this QE2 figure given to Local Authorities across the nation, ring fenced and used to build low-rent housing on council owned brownfield land would have a much greater impact on the wider economy and crucially would be perceived by the wider population as a step forward.

  • rate this

    Comment number 132.

    Elect a bunch of monkeys who employ more monkeys, not an original thought or spark of intelligence among them, just self interest – the result is chaos and confusion and our children’s children will be impoverished for life. SICKENING! Big crisis needs big ideas not the same old policy that we know wont work.

  • rate this

    Comment number 131.

    6th October 2011 - 15:03
    Removed but perhaps relevant! Two George Osbourne comments separated by a general election!

    09/01/2009 - "QE is the last resort of desperate governments when all other policies have failed" - George Osborne

    06/10/2011 - "QE is an appropiate tool" - George Osborne


    There is no contradiction.

  • rate this

    Comment number 130.

    What about the British small business that need credit to grow? It does appear that very litlle of that money will go to the "real economy" so small business can grow or new business can be created in Britain so new workers can be employed. Unfortunately, City and the casino economy will take precedent from the "real economy". Playing pocket machines with the citizen's and the addiction continues

  • rate this

    Comment number 129.

    If the Bank of England can use QE to buy up bonds and put money into the hands of commercial banks why can't it simply lend this new money direct to the small businesses etc that desperately need it? It would then have much more beneficial impact.Putting more money into the hands of these banks is no guarantee that it will find its way to businesses,I say lend direct to businesses!

  • rate this

    Comment number 128.

    Printing money=inflation=people have less to spend=economic slowdown=??? yes Print more money.

    It's the economics of the madhouse. If it were happening in a banana republic the media would be reporting it as madness. Because it is happening in the UK it is dwscribed as helping the economy. Buy wheelbarrows is my advice.

  • rate this

    Comment number 127.

    124 Ianhenda

    You are right, as a serious manufacturing nation we have ceased to exist on the economic landscape, unlike the strong countries, Germany, China and Japan. We have little in exports that would be of much interest to them, as they can produce much of what they need themselves. But a weaker pound means that we have to import and pay more for raw materials etc. So QE= disaster for us

  • rate this

    Comment number 126.

    "Some say that QE is all a confidence trick... I will be interviewing Mervyn King this afternoon. I have a funny feeling he will see it differently"

    A little out of context I admit but taken from this article, I didn't hear you pushing the idea that this doesn't have a real effect overly much on your interview Stephanie? Could have made it more interesting

  • rate this

    Comment number 125.

    I am a baby boomer, terrified of inflation, because it is the one factor which could make the difference between a modestly comfortable retirement and poverty in my old age. There are millions of people in our aging population, who are in the same position as me. The effect of QE on us will be that we rein in our spending even more, in an effort to save more for the future.

  • rate this

    Comment number 124.

    We are in a "financial mess". Nobody really knows the way out. Historically we could manufacture our way out of a recession but now our main industry is the financial sector as our government has allowed the outsource of most of our industry to the Far East and Eastern Europe this is longer possible so we are left with our tail between our legs wondering what to do! I know let's manufacture money!

  • rate this

    Comment number 123.

    Yet more scandalous daylight robbery by frauds and conmen, thinly disguised with the pseudo-scientific "quantitative easing". And MK can go on TV with a straight face and effectively say screw the savers, screw the pensioners, screw the thrifty, we must protect the feckless and greedy, the crooked bankers, the corrupt and inept politicians. Unbelievable, yet the majority are too blind to see it.

  • Comment number 122.

    This comment was removed because the moderators found it broke the house rules. Explain.

  • Comment number 121.

    This comment was removed because the moderators found it broke the house rules. Explain.

  • rate this

    Comment number 120.


    The government are to purchase Government bonds from the banks....
    I take it this will be any Government bonds...e.g.....Greece + Italian + Spanish Government bonds....

    Oh, I see now....This is to prevent British Banks getting fleeced when these bonds become worthless or depreciate by at least 50%...

    British Banks again protected and Joe Publics picks up the TAB..


  • rate this

    Comment number 119.

    ...£72 billion quid, that might almost be enough to finish the Edinburgh tram system...

  • rate this

    Comment number 118.

    Just a final thought before I go to bed. Recently there was a sort of Keynes versus Hayek thing going on on these pages. We seem, to my layman's eye, to have a bit of a mixture of both going on at the moment. The last QE (Keynes) failed us, not the bankers. Now we have QE2 weirdly joined with austerity. ALL except bankers are suffering. Let's go for all out Hayek and see the bankers obliterated.


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