The Bank of England has announced a £50bn extension to their programme of quantitative easing (QE), designed to stimulate the UK economy.
Once this extension has been completed, the Bank would have effectively printed £325bn of new money.
The programme started in 2009 and is designed to free up more cash for banks to lend to borrowers. It works by the Bank of England creating new money which is used to buy government bonds (Gilts).
As a result of the existing QE measures, UK gilt yields have already fallen to a historic low of around 2%. This latest QE extension could push gilt yields lower still.
Whilst keeping down the cost of borrowing is beneficial to the UK economy, as it allows the government to borrow at a lower cost and keeps the interest bill on public debt lower, it is potentially bad news for those reaching retirement.
Lower gilt yields translate into lower annuity rates for people at retirement. They also result in lower maximum income limits for people using the Unsecured Pension option.
Whilst QE does appear to improve investor sentiment and push the equity markets higher, this does not fully offset the damage it has done to the incomes of those reaching retirement.
One aspect of QE that does not appear to have materialised is the hyperinflation touted by many as a potential consequence of the liquidity easing measure.
Whilst price inflation has been stubbornly high in recent years, this has largely been the result on imported inflation, rather than domestic inflation caused by QE.
Whether QE produces the desired economic results remains to be seen. Perhaps the Bank should do as one Twitter follower suggested this morning and instead distribute £10,000 to every taxpayer, with the condition they spend the money on UK goods and services within the next six months?
The announcement of further QE was reasonably expected today; the decision to keep interest rates on hold at 0.5% was inevitable.
We still do not see any conditions where interest rates will start to rise in the near future. Savers, borrowers and investors should plan accordingly.
Photo credit: Flickr/PhotoGraham
