Why did we decide to inject further monetary stimulus into the economy? And how likely is it to be effective? We started quantitative easing in March 2009 in the aftermath of the collapse of Lehman Brothers, as the UK economy was undergoing its deepest post-war contraction. Bank Rate was almost as low as it could go and further stimulus was necessary to put a floor under demand and get the economy growing again. All told we bought £ billion of gilts during that initial phase of quantitative easing. Quantitative easing essentially involves trading one liability of the state – gilts – for another – monetary claims on the Bank of England. We aim to buy mainly from non-bank private financial institutions, such as pension funds and insurance companies, not from the  BIS central bankers’ speeches  1  banks, as is sometimes erroneously claimed 1. When we buy a gilt, we simply credit the bank account of the seller with an appropriate sum. If the seller were indifferent between holding the gilt and holding the associated bank deposit, that is where things would stop. But because deposits tend to yield less than gilts and assets such as corporate bonds and equities, the seller is likely to want to buy some other asset instead. The consequence is upward pressure on the prices of a whole range of assets, including corporate bonds and equities. That increases the availability, and reduces the cost, of finance to corporates.
During late 2009 and through 2010, a recovery of sorts appeared to be taking hold and, by the beginning of last year, some of us were starting to think that the time to begin withdrawing some of the monetary stimulus might be starting to draw near. As the year wore on, though, it became increasingly clear that the underlying growth rate was moderating. To begin with, that reflected a continuing squeeze on household real incomes, and thus on spending, resulting from the increase in the standard rate of VAT in January and the impact of higher energy and import prices. In fact, real household income declined a total of 2½% in the two years after output troughed, whereas in normal conditions it might have been expected to rise about 5% in that time. But since last August, the deterioration also seems to have reflected heightened concerns about the prospects for the euro area. That was reflected in much tighter funding conditions for European banks, including those in the United Kingdom, and increased caution on the part of businesses both in regards to hiring and capital spending. Output is reported to have contracted by 0.2% in the final quarter, though some of the business surveys at the start of this year suggest that the economy may again be expanding. It was that deterioration in the outlook that led us to restart our asset purchases in October.