11 Pages Posted: 17 Jun 2009
Date Written: June 12, 2009
The Monetary Policy Committee’s recent decision to expand the money supply through large-scale asset purchases (or ‘quantitative easing’) shifted the focus of monetary policy towards the quantity of money as well as the price of money. With Bank Rate close to zero, asset purchases should provide an additional stimulus to nominal spending and so help meet the inflation target. This should come about through their impact on asset prices, expectations and the availability of credit. However, there is considerable uncertainty about the strength and pace with which these effects will feed through. That will depend in part on what sellers do with the money they receive in exchange for the assets they sell to the Bank of England and the response of banks to the additional liquidity they obtain. The MPC will be monitoring a range of indicators in order to assess the impact of its asset purchases and therefore judge the appropriate stance of monetary policy.
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