The three way split within the Bank Of England's Monetary Policy Committee  over the future of quantitative easing highlighted the different interpretations of QE within the committee itself.

After this week's news about the CPI inflation rise the question reverberating within the heads of economists and city traders is "Has quantitative easing produced the 1.5% increase in  inflation?"

I think the answer is it probably has but not in the way most people think.

The misunderstanding of what quantitative easing actually is may have been a self fulfilling prophecy by the doom and gloomers.

Most people see QE as nothing more than Weimar money printing, filling up the banks with new cash making them richer than they have ever been to the point where the doors to the bank vaults are bursting their hinges with all the extra cash sloshing around.

This of course is completely untrue and the real nature of QE is something entirely different. Quantitative easing is an asset purchase program which is the description that the Bank Of England use and it is an accurate description.

In simple terms its like premium bonds, if I own £30,000 worth of premium bonds (my premium bonds being the asset) and the government wishes to purchase my premium bonds for £30,000 then I am no richer than I was to start with but I do have available cash.

However seeing as I was prudent enough to save £30,000 and keep them in premium bonds where they were safe and giving me a nominal return why would I want to go and risk lending that money in a country racked with debt and risk my capital position?

I wouldn't and neither would the banks, they may well invest in the stock market or overseas in countries less damaged by the recent global economic crisis but investing in the British economy would be a big no.

So you would think that QE would be absolved of blame for the rise in inflation…..not quite.

Speculation by overseas investors at the state of the UK economy and its enthusiastic use of QE (highlighted by the doom and gloomers) may have been a key factor in driving down the pound against outside currencies. This would have an effect on inflation by increasing the costs of importing into Britain so in that sense QE may have caused a slight increase in inflation but as soon as the pound gains new ground and QE ends and is reversed all residue inflation will disappear.

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