The Bankwatch

Tracking the consumer evolution of financial services

Where does money come from | BofE

An interesting two pager from the Bank of England in response to a freedom of information enquiry.  It includes this succinct explanation of Quantitative Easing (QE).

Where Does Money come from | BofE | FT Alphaville

Nowadays, it is central banks that have the ultimate role in creating money. They generally do so in
response to the demand for money – through both the issue of banknotes and the creation of
so-called ‘central bank reserves’ on the accounts of commercial banks (which use this money to
make payments to one another).

The demand for money is usually affected by the level of interest rates. You may be aware that the
Bank’s Monetary Policy Committee (MPC) is responsible for setting Bank Rate to meet the
Government’s inflation target of 2%, as measured by the 12-month increase in the Consumer Prices
Index (CPI). In addition, since March 2009 the Bank has been creating extra money by purchasing
assets in order to meet its inflation target. This is referred to as Quantitative Easing (QE). Under
QE, the Bank purchases assets and credits the relevant bank’s reserve account with the additional
funds. This generates an expansion in the supply of central bank money.

3396955-boe-money PDF

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Written by Colin Henderson

May 24, 2010 at 14:25

Posted in Uncategorized

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