The Bank of England's Monetary Policy Committee (MPC) has announced that it will use further bond buying to support the UK economy through the current coronavirus crisis. This latest round of quantitative easing will pump a further £100bn into the economy and raises the Bank’s total asset purchase programme to £745bn since 2008.
The Bank's announcement was widely anticipated, as was the decision to maintain interest rates at a record low of 0.1% given the ongoing pandemic and restrictions on businesses.
Inflation rates, measured by the consumer prices index (CPI), fell to 0.5% in May from 0.8% in April, far below the BoE target of 2%.
A study of fast-moving consumer goods (FMCG), which include groceries and regular household purchases, by Kantar research firm however showed that these regularly purchased goods have risen in price by 2.4% in one month from March 23rd. This was the time the UK entered into lockdown.
That is almost 1% above the inflation rate for March which was just 1.5% and means the average grocery bill has actually shot up since March.
With even the best ISAs offering just over 1% in returns, the rise in the cost of everyday items of 2.4% is therefore not being met, meaning savers are looking for new places to invest their wealth.
Many economists believe that quantitative easing, however well intended and carefully controlled, inevitably leads to inflation, and while no physical notes are printed it is generally referred to as money printing. A major concern must be that the 2.4% inflation in general purchases could lead to broader inflation across all markets in the coming months.
In the here and now, the news of the Bank’s decision to pump more liquidity into the UK economy has inevitably affected the Pound. Sterling has fallen by over a cent in the past 24 hours to its lowest value against the Dollar since the end of May.
This weakening of the Pound gave gold a boost that has seen it climb back above £1,400 per troy ounce today, for the first time also since the end of May. With money printing becoming a more common occurrence for the BoE, more and more investors are beginning to realise the value of a physical asset like gold cannot be devalued in the way the BoE is happy to with the Pound.