The Bank of England is to inject billions of pounds into the UK financial system as interest rate reductions run out of scope.
It plans to pump £75 Billion ($140 Billion) into the money markets over the next few months in order to free up the credit lending markets, which have been drastically hit, caused by the American led credit catastrophe.
This method of injecting money is called Quantitative Easing and often described as literally "printing money". In this case, money isn't printed. The BOE will buy up UK Bonds in the financial markets. Paying for these bonds effectively gives those investors the money for these assets, hence expanding the amount of money in the economy.
These Bonds are not the same as UK Premium Bonds, a lottery draw based on national saving certificates.
This should free up some money in the economy for lending - unless the banks do not hoard the money. The danger in this type of financial wizardry is that this risks the increase of inflation. Inflation as every economist will tell you is the enemy of the bond market. Bonds pay out a fixed rate of interest over a given period, therefore inflation erodes the value of the returns. A 5% p.a. rate of return with 5% inflation gives no return and who invests for zero profit? Nobody.
Quantitative Easing should in theory help Gilt and Cooperate Bond prices.
Most people buy an annuity with their pension pot at retirement, giving them a guaranteed level of income for life and the rates on annuities are determined by gilt yields. This market is potentially at risk through high inflation.
