Quantitative Easing in the UK

How did the UK initially respond to the crisis using conventional monetary policy?

• The Bank of England reduced the interbank borrowing rate six times in six months, from 5% in October 2008 to 0.5% in March 2009, the lowest level since 1694, when it was established.
• The UK government established a bank bail-out scheme in October 2008, totalling £500 billion to purchase bad loans, and if needed, to recapitalise the largest banks in the UK

How did the UK respond to the BREXIT decision?

• Following the decision to leave the EU, the Bank of England decreased the bank borrowing rate from 0.5% to 0.25% and announced a new round of QE as preventative measures to help the UK economy from falling into recession
• The BOE reacted to slightly above-target inflation of 2% by raising rates for the first time in 10 years to 0.5% in Nov2017, and then to 0.75% in Aug2018. Hence, so far, during the post-referendum period, the UK has managed to avoid a recession

What did the first round of QE (QE1) consist of?

• The first round was announced in March 2009
• Involved the purchase of Gilts, and the amount was increased four times during the course of 2009, ultimately reaching £200 billion
• The first round of QE officially ended in January 2010

What did the second round of QE (QE2) consist of?

• The second round was announced in October 2011
• The aim was to combat higher inflation, fears of a double-dip recession and the growing collateral effects from the Eurozone peripheral sovereign crisis
• This round of QE totalled £175 billion
• Focused on additional purchases of mainly Gilts in two phases that took place through November 2012

What did the third round of QE (QE3) consist of?

• Third round began in August 2016
• The aim was to combat fears of a recession following the surprise referendum result in June 2016 in favour of the UK leaving the EU
• This round of QE totalled £60 billion of Gilts and £10 billion of corporate bonds
• This was coupled with steps to support banks in the low-interest rate environment

What was the overall impact of the three programmes of QE?

• At the end of September 2019, the Bank Of England’s balance sheet stood at £587 billion
• GDP increased from its low of £1.5 trillion in recession-hit 2009 to £2.1 trillion in 2018.
• Annual inflation was 1.7% in August 2019
• Unemployment in the UK was 3.8% for the quarter ended July 2019