Even bringing the interest rate down to an all time low doesn't mean the banks will listen and start lending again or as much as the Bank of Scotland thought banks would. So they've resorted to quantitative easing.
Quantitative easing is when the central banks buys assests (mostly corporate and government bonds), but they use money that they've just created or in other words "printed off", but since we are living in the 21st century this is all done electronically. By doing this commercial banks and financial businesses will have newly created money in their accounts which means there is more money in circulation, increasing the money supply.
There are two effects which will hopefully occur through this method: By conducting reverse auctions for government bonds (sellers competing to sell so as to reduce price), it starts increasing the amount of money within bank's bank accounts this may then increase lending activity of banks, this will then help improve activity of the economy. The other effect is when bonds are bought this reduces the availability of them within the economy, this increases demand for the bonds and should it make it easier and cheaper for businesses to borrow.
Since short-term interest rates are as low as possible only long-term interest needs to be driven down, long-term interests are used by companies for long-term investments and individuals for things such as mortgages.
Now analysts are debating whether quantitive easing has been a success or not since it's hard to calculate how much worse off the economy would have been without putting the quantitive easing into practise.
So far reports from the Bank of England have suggested that it has helped boost GDP by between 1.5% and 2% which means that the scheme may be economically effective and rewarding for the long run despite doubts.
Quantitative easing is when the central banks buys assests (mostly corporate and government bonds), but they use money that they've just created or in other words "printed off", but since we are living in the 21st century this is all done electronically. By doing this commercial banks and financial businesses will have newly created money in their accounts which means there is more money in circulation, increasing the money supply.
There are two effects which will hopefully occur through this method: By conducting reverse auctions for government bonds (sellers competing to sell so as to reduce price), it starts increasing the amount of money within bank's bank accounts this may then increase lending activity of banks, this will then help improve activity of the economy. The other effect is when bonds are bought this reduces the availability of them within the economy, this increases demand for the bonds and should it make it easier and cheaper for businesses to borrow.
Since short-term interest rates are as low as possible only long-term interest needs to be driven down, long-term interests are used by companies for long-term investments and individuals for things such as mortgages.
Now analysts are debating whether quantitive easing has been a success or not since it's hard to calculate how much worse off the economy would have been without putting the quantitive easing into practise.
So far reports from the Bank of England have suggested that it has helped boost GDP by between 1.5% and 2% which means that the scheme may be economically effective and rewarding for the long run despite doubts.
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