The United Kingdom introduces Quantitative Easing

[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.