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Quantitative Easing · 6 of 9

Quantitative Easing and Inequality

Explain why, on the Resolution Foundation's estimate, quantitative easing widened the gap in wealth in pounds while narrowing the gap in income, why the House of Lords Economic Affairs Committee and the Bank of England disagree about it, and why the purchases now make the public finances pay more when Bank Rate rises.

Before you start

What you'll be able to answer

  1. Why did the households that already owned assets gain most from the purchases?
  2. What did the purchases do to the gap in incomes?
  3. Why do the Lords committee and the Bank of England disagree about whether the purchases made Britain more unequal?
  4. Why does a rise in Bank Rate now raise the government's interest bill straight away?

Where this sits

Quantitative Easing · this module is lit

  1. 1998The Bank of England Act gives interest rate decisions to a committee at the Bank; the Chancellor keeps the target
  2. Mar 2009Bank Rate is cut to 0.5 per cent, and the Bank starts buying government bonds with newly created money
  3. Aug 2013The Bank says it will not consider raising interest rates at least until unemployment falls to 7 per cent
  4. Mar 2020Bank Rate is cut to a new low
  5. Jan 2022Banks' reserves at the Bank reach their highest level
  6. Sep 2022The Bank buys government bonds again, to stop forced selling by pension funds
  7. Oct 2022Consumer price inflation reaches 11.1 per cent
  8. Nov 2022The Bank starts selling its bonds to investors, among the first central banks to do so
  9. Aug 2023Bank Rate reaches its peak after rises at consecutive meetings
  10. Apr 2026The Governor writes an open letter to the Chancellor after inflation overshoots the target

The Bank of England set out who had gained from its purchases

On 12 July 2012 the Bank of England published a paper on who had gained and who had lost from its purchases of gilts, the government's bonds. Bank Rate had been at 0.5 per cent since March 2009, and savers were earning little. Policy is set for the economy as a whole, the paper said, but any change in monetary policy helps some households more than others.

Predict first

The purchases pushed up the prices of shares and bonds. Which households do you think gained the most, in pounds?

Higher asset prices made the households that owned assets richer

The Bank bought gilts from investors, and the investors used the money to buy other assets, such as company shares and bonds. That pushed up the prices of those assets too. Anyone who owned them became richer, and the more they owned, the more pounds they gained.

The Bank estimated that its first round of purchases raised the value of households' financial wealth, including part of their pensions, by about 16 per cent. Ownership was very uneven. A survey for the Bank in 2011 found that the median household, the one in the middle, held about £1,500 in savings accounts, shares and other financial assets, not counting pensions. The top 5 per cent of households held £175,000 on average, about two-fifths of all households' financial assets.

On the Resolution Foundation's estimate, the wealthiest tenth of families took the largest share of the gain

In 2019 the Resolution Foundation, a research body that studies living standards, estimated how the gains in wealth were shared across Great Britain between 2006-08 and 2012-14. It used the Bank's own estimates of what the purchases did. Unlike the Bank's survey, which covered financial assets only, it counted gains from higher house prices and private pension pots too, and the effect of inflation on savings and debts. On its estimate, 40 per cent of the aggregate gains, the total gain across all families, went to the wealthiest tenth of families, and only 12 per cent went to the whole bottom half.