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It will improve the capital position of the bank

It will stimulate the growth in money supply to real economy.

The purchase of asset has raised the monetary base but growth in lending activity was slow in 2009 and is improving in 2010 (European economic forecast, 2010). Quantitative Easing came to halt as inflation rate was rising rapidly in 2010 and has overshot the target of bank of England of 2%.

IMPACTS OF QUANTITATIVE EASING

Impact of QE is a humongous two hundred billion pound question. There are various approaches to classify the impact of QE; one way to assess the impact of acquiring assets would be by considering the rise of broad money.(include theory of broad money) A vital reason underlying the asset purchase programme(QE) is a mechanism running from appreciating money balances onto higher asset costs and nominal spending. This mechanism can be simplified using a process of portfolio rebalancing of which the products of different assets adjust for the purpose of willing holding higher level of money balances. The same mechanism if expressed in a monetarist approach, the assets acquired would then work through measures of money disequilibrium which would then increase additional spending. Sometimes these frameworks might be presented as conflicting but essentially they share the same fundamental as why monetary policy at zero bound can spur nominal spending(Spencer dale , 2010)

Banks desire to reduce leverage coupled with the decline in nominal spending means that had monetary injection been absent, broad money would have definitely been much weaker. But this is also indicative of the amount of new debt and equity raised by the UK banks in this period, along with retained profit, totalling over 85 billion pound.

The impact of QE announcements on asset prices over relatively short windows (Bernanke, Reinhart and Sack 2004). Gilt Yields respond to such policies majorly because of two reasons, firstly due to the impact gilt purchases have on yields at which various investors prefer to hold reduced supply of gilts i.e. the portfolio balance effect and secondly due to the impact that the announcement is perceived to contain about the future position of monetary policy i.e. one of the elements of expectation channel. (Spencer dale , 2010)

The variations in the OIS rates post policy announcements are a definite pointer to the extent to which policy announcements impact expectations of future position of monetary policy. OIS rates fell drastically after the initial announcements of QE, predominantly at short horizons, indicating that these announcements were the chief reason for market players to revise downwards the predicted future path of Bank rates.

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