Newspaper article The Journal (Newcastle, England)

Bank Gets Permission to Print Money; SHARE WATCH Taking Stock

Newspaper article The Journal (Newcastle, England)

Bank Gets Permission to Print Money; SHARE WATCH Taking Stock

Article excerpt

Byline: FIONA ERDOZAIN

THERE have been many references in the press and much air time given recently to the concept of "quantitative easing" and how the Monetary Policy Committee (MPC) may deploy such a strategy in the face of a worsening economic picture. For many, this is likely to pose a number of questions, the most prevalent of which are surely: What is quantitative easing and how have we come to need it?

To answer these questions we must first turn to the Bank of England. A principal objective of the Bank is to deliver price stability (low inflation); price stability is defined by the Government's Consumer Price Index (CPI) inflation target (currently 2%).

However, the aim is not to achieve the lowest rate possible, as very low inflation is deemed to be as bad as inflation above the target rate. The Bank of England seeks to meet this rate of inflation by setting interest rates. In doing so it is attempting to influence the overall level of expenditure in the economy.

In 2008, the CPI level of inflation exceeded the 2% target significantly, peaking at 5.2% in September, driven largely by the high cost of food and energy. The MPC was therefore forced to maintain interest rates at 5% until October when, in a special meeting, the Bank Rate was cut by 0.5% to 4.5% on concerns that the outlook for the economic activity in the United Kingdom had diminished dramatically and that inflation, whilst still rising, was likely to drop back significantly as fuel retail energy prices decreased.

The prospects for a substantial downward shift in inflation became more prevalent and there was a marked deterioration in the outlook for economic activity both at home and abroad. In contrast to earlier in the year, the downside risk was that a sharp slowdown in the economy, associated with weak real income growth and the tightening in the supply of credit, would mean that there was a substantial risk now of undershooting the 2% CPI inflation target in the medium term. …

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