Page last updated at 12:03 GMT, Thursday, 8 January 2009

Q&A: What else can the Bank do?

Bank of England
The Bank may have to resort to more unconventional monetary policy

The Bank of England has cut interest rates to 1.5% - the lowest level in its 315-year history.

With rates unable to fall much further, the Bank of England and the Treasury may need to look to more unconventional methods in an effort to kick-start the economy.

Is the Bank of England really going to start printing more money?

"Printing more money" is a simple shorthand for a more complicated process called "quantitative easing".

This is a way to stimulate the economy by increasing the amount of money flowing around, but does not actually involve the printing of more 20 notes.

The US Federal Reserve has said it wants to go down this route. Japan tried it the 1990s, though with limited success.

How would they do it?

The Bank of England would write out cheques to banks in exchange for assets (for example, government bonds or corporate investments).

The hope would be that the banks would lend this money to all of us. We would spend it and therefore boost the economy.

The money supply would thus be expanded. This includes electronic money (ie plastic cards and cheques) as well as notes and coins.

The government could also create more bonds (known as gilts) and sell them to the Bank of England.

So the government receives money, which it then invests in the economy via spending or tax cuts.

What are the risks?

Quantitative easing is a high-risk strategy.

If it is not done aggressively enough, banks will remain unwilling to lend and the crisis could drag on.

The government and the Treasury do not want the UK to repeat Japan's experience in the 1990s, when it endured a "lost decade" of slow growth and deflation.

However, quantitative easing, like old-fashioned money printing, also runs the risk of creating hyperinflation - as seen in Weimar Germany and Zimbabwe.

The chance of such a scenario in the UK is very small, but economists warn there is a risk that we could lurch from deflation to inflation.


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