Gate.io Blog The United Kingdom introduces Quantitative Easing

The United Kingdom introduces Quantitative Easing

10 October 18:45

[TL; DR]

The United Kingdom introduced quantitative easing on 28 September 2022 in a bid to restore orderly market conditions.

The quantitative easing will last for two weeks, till mid October.

Basically, quantitative easing helps to reduce interest rates in a country.

It also stimulates economic activities through injecting liquidity in the economy.

Keywords: Quantitative easing, BTC, cryptocurrency, United Kingdom, British pound, central bank, Bank of England, bond, stock, long term assets, interest rates, inflation

Introduction

The United Kingdom has taken a bold step to stop the financial crisis it faces as a result of the repricing of its financial assets on a global stage. On 28 September, 2022, the Bank of England embarked on purchasing long-dated government bonds to “restore orderly market conditions.” It promised to buy the bonds at whatever scale necessary to reposition the country’s financial state and economic viability to the required level.

The British government took this step to reduce the cost of borrowing that surpasse what other countries such as Italy and Greece pay. According to the Bank of England, purchasing of government debts, called gilts, will last for only two weeks. As a point, the British 30 year bonds are at the highest price ever since 2002.

The Bank of England spokesperson said, “These purchases will be strictly time limited, and completed in the next two weeks. To enable the Bank to conduct this financial stability intervention, this operation has been fully indemnified by HM Treasury.”

Source: Bankofengland

Basically, the Central bank intends to hold auctions to buy up to 5 billion pounds of gilt with a minimum maturity age of 20 years. This process of buying back some long term government bonds is called quantitative easing (QE). Already, economic observers are analyzing the effects of this move on prices of cryptocurrencies, particularly bitcoin.

Understanding Quantitative Easing (QE)

Quantitative easing is a monetary measure where a central bank purchases long term securities to increase money supply and reduce interest rates in an economy. The aim is to increase the level of lending to stimulate economic activities.

The government, through the central bank, buys long term securities such as bonds from the open market. By doing this, it focuses on increasing liquidity in commercial banks, creating new bank reserves as well as promoting lending and investment in the country.

When the government purchases treasury assets, stocks, government and corporate bonds it induces liquidity in the economy. As the money supply increases interest rates decrease promoting lending and borrowing. Note that through quantitative easing, the government does not target short term interest rates but long term ones.

In short, quantitative easing has the same effect as reducing the bank rate, a move which stimulates investment and consumer spending in the economy. Also, it has the same effect as printing more money.

Effects of quantitative easing in the economy

Since central banks buy stocks, bonds and treasury assets, financial institutions get more funds which they lend to investors and consumers. They can also buy the assets they want to increase their operations.

The increase of liquidity in the economy prevents financial problems such as credit crunches which occur when there is a decrease in available loans. As such, most financial institutions operate on their optimal levels.

When the government purchases long term financial assets such as bonds, their prices increase whereas their yields decrease. Low interest rates enable investors and consumers to borrow more funds, thereby increasing the purchasing power in the economy.

Source: HBRORG

On the whole, quantitative easing boosts confidence in the economy. This is because QE ensures that the government is in control of the economy and is striving to create an enabling investment climate. In return, investors can borrow funds from financial institutions and invest in securities such as stocks.

How Quantitative easing affects the price of bitcoin

As explained above, quantitative easing increases liquidity in the economy and enables investors to access loans. Notably, there is a high likelihood that some investors will purchase bitcoin since it is an investment asset. This has an impact of increasing its demand and price.

There is evidence that supports that quantitative easing may result in a rise of the price of BTC. Between 2009 and our present time, the United States government introduced QE two times. The first QE was in November 2010 and the other one in 2012. On both occasions the price of BTC significantly increased.

In addition to being a reputable investment asset in the blockchain sector, BTC has an important attribute that attracts investors. It is different from precious minerals like gold in that it is highly divisible. This enables investors to purchase any fraction they can afford like 0.01BTC. In addition, bitcoin is portable and fungible which makes it more attractive than tradable traditional commodities.

Nevertheless, the potential of the QE to influence the price of BTC depends on how the investors view it. If many investors view BTC as a safe haven, they invest in it thereby pushing its price up. In this case, it depends on how the majority of British investors view BTC.

One effect of quantitative easing is that it pushes interest rates down which influences some investors to budge out of the risk curve, thereby investing in riskier assets such as BTC. The investors do so to maintain or increase the level of return on investment.

Quantitative easing creates an investment climate that is similar to the one we experienced during 2020 and 2021 when there was much money printing in the United States after the off-peak Covid 19 period. It was during that period when the price of BTC significantly increased, turning into a bull-run.

Source: Bitdegree

A crypto analyst with Finder, James Edwards, said, "if central bank currencies continue to slide severely, and quantitative easing resumes on a wider scale, both bitcoin and cryptocurrency markets could see a renaissance as traditional finance continues to struggle against macroeconomic headwinds."

Disadvantage of Quantitative Easing

Although quantitative easing has several disadvantages, the major one is that of inflation. Naturally, the rise in money supply in the economy increases inflation in the country. The reason is that while the supply of money expands, there is no commensurate increase in the quantity of goods and services producers supply to the market.

Secondly, quantitative easing does not produce the same results when used in different economies. Its success depends on the context in which it is used such as other supportive monetary and fiscal measures.

Conclusion

The Bank of England introduced quantitative easing with effect from 28 September 2022. However, the QE will only last for two weeks, a period in which the government should have achieved the target of stabilizing the long term asset market. Many crypto experts believe that if the QE produces the desired effect, it could lead to greater demand for BTC resulting in a higher price.

Author: Mashell C., Gate.io Researcher

This article represents only the views of the researcher and does not constitute any investment suggestions.

Gate.io reserves all rights to this article. Reposting of the article will be permitted provided Gate.io is referenced. In all cases, legal action will be taken due to copyright infringement.

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The United Kingdom introduces Quantitative Easing

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