The Bank of England has increased its base Bank Rate as it was predicted to 0.5pc, firstly within more than a decade.1 The policy of Quantitative Easing implemented before has encouraged spending rather than saving. A cut of interest rates close to zero (so-called Quantitative Easing),which is a tool used by central banks in order to stimulate the economy when the economy is developing slowly. In contrast, the UK’s case, despite the trade deficit and wages stagnation has led to the Bank of England rise of interest rate mostly because of its legal mandate of holding inflation to 2%, and the rate has now hit 3%. Phasing out Quantitative Easing tends to have a significant influence on households and banks. As for instance, it will reflect on existing mortgages (particularly, their rates will rise quickly), credit card rates would be increasing, on average, the same for the cost of individuals’ loans and overdrafts. The impact of phasing out Quantitative Easing for the banking industry is widely discussed in this report since it is the case which countries are facing at this certain period of time.
The process of phasing out quantitative easing has more benefits for the banking industry than drawbacks mostly because of a balance sheet reduction that theoretically shall lead to an increase in longer-term rates of banks. As a result, an increase of FED rate tends to have strong relationship with higher bank profits. From 2009 to 2014, the Fed’s Quantitative Easing program has doubled the balance sheet to 4.3 trillion USD. In 2014, the Fed stopped buying securities and ended the QE program. The balance sheets of both the Federal Reserve System have grown via their use of QE. But should their balance sheets be “unwound?” It is the question to an accountant and its not a very serious concern.
Ultimately, the main aim for FED and the Bank of England is to keep their economies fully employed and to keep the level of prices stable. This goal has to be pursued with no regard to what it does to the balance sheet.