The Bank of England has announced a fresh round of money printing in an extension to its Quantitative Easing program.
Having already increased the QE program several times this year, the new influx of cash now brings the total to an eye-watering £895 billion. £875 billion of this is used to purchase government debt in the form of bonds, with the remaining £20 billion in corporate debt.
The announcement this morning comes as England enters a second national lockdown, with many non-essential businesses closed for the next four weeks. The lockdown is expected to be the final blow that will push the UK economy back into a double-dip contraction, just one quarter after staging a small recovery.
Assuming the current lockdown ends as planned on December 2nd, the BoE forecasts that the UK economy will contract by 2% in Q4, leaving an overall 2020 fall of 11% - far worse than both US and EU, due to the heavy reliance on the service industry to fuel the UK economy.
The increase in the QE program came shortly before the Chancellor announced this afternoon that the Job Retention Scheme will be extended until March, with the government once again paying up to 80% of an employee’s wages. Unemployment is still growing however, with Lloyds and Sainsbury’s the latest to cut jobs as businesses adapt to the new UK retail environment.
Many analysts are instead wondering how effective QE will be in stimulating growth. While intended to encourage lending, few businesses and individuals are looking to take on debt in such uncertain times. Banks meanwhile will be increasingly nervous of lending when economic growth is falling, and default risk is growing.
Interest rates have been low for over a decade now, punishing savers. Image courtesy of BoE November 2020 Monetary Policy Report.
With interest rates remaining at just 0.1% the Bank has little room for manoeuvre in its policy decisions going forward, though it has confirmed it is investigating the possible use of negative interest rates. For now, money printing is all that is left to it, and there could be more to come in the future if the economy continues to struggle into 2021 and beyond.
The risk of course is that the unprecedented amount of new money being pumped into the economy will instead see inflation surge at some point in the near future. Lockdowns are currently keeping prices subdued, as business fight to keep prices low and customers buying. Low oil and fuel prices have also helped contribute to low inflation. As restrictions ease however and the economy adapts to the hundreds of billions of pounds added to it, inflation will undoubtedly rise.
In the meantime, low interest rates mean savings throughout the UK will be sitting in accounts earning virtually no interest. Add in inflation and these savings will in truth be falling in value. Demand for precious metals then will remain high so long as such money printing continues to drive up inflation, as people turn to other ways to store and protect their wealth.