That was potentially a very important supportive step as a good proportion of businesses in the UK had floating rate loans which were linked to the LIBOR rate. GDP stabilised by the end of 2009, and grew at close to trend rates in the first half of 2010. The prospect of deflation, which had been a hot topic during early 2009, now seems much less likely. Indeed, press commentary through 2010 has instead mostly been focused on the elevated rate of CPI inflation (which reflects the temporary impact of a series of short-term price level shocks). 7 Why we did it the way we did Although QE was an “unconventional” monetary policy operation, it was not totally without international precedent, having been tried most notably in recent times by Japan. The Japanese programme is generally considered to have been a mixed success at best. Such a judgement is perhaps unfair but there were a number of lessons to be learned from their  3  For further discussion, see Cross, Fisher and Weeken, (2010), “The Bank’s Balance Sheet During the Crisis”, Quarterly Bulletin, 50, 1, pages 34–42. 4  See Benford, Berry, Nikolov and Young (2009). “Quantitative Easing”, Quarterly Bulletin, 49, 2, pages 90–100. 5  Joyce, Lasaosa, Stevens and Tong (2010). “The Financial Market Impact of Quantitative Easing”, Bank of England Working paper number 393. 6  London Inter-Bank Offer Rate – see http://www.bbalibor.com. 7  For more discussion see Fisher (2010), “Why is CPI inflation so high”. Speech to the Merseyside Young Professionals, June.
Why we did it and how well it worked The global financial shock associated with the collapse of Lehman Brothers and AIG in September 2008 triggered a sharp and synchronised downturn in the world economy. In the UK, GDP fell nearly 4% in 2009 H1 alone, and by the end of that year was some 10% below where it would have been, if growth had continued at its previous trend. This was one of the largest falls in output ever recorded in the UK. At its March 2009 meeting the MPC cut Bank Rate to just 0.5%, the lowest level in the Bank of England’s 300 year history. While that represented a significant loosening of monetary policy, the MPC agreed that more stimulus was required to mitigate the risk of depression and deflation. Given that Bank Rate was close to its lower-bound, the MPC decided to increase the supply of money in the economy directly, by embarking on a programme of asset purchases, financed by the creation of central bank reserves (QE). This largely took the form of purchases of UK government bonds – “gilts” – but included small purchases of corporate bonds and commercial paper undertaken in order to improve conditions in those markets. I won’t say any more about the latter today.