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MSE News: Pensions and savers hit as Bank prints more money

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MSE News: Pensions and savers hit as Bank prints more money

edited 30 November -1 at 1:00AM in Savings & Investments
71 replies 6.2K views
Former_MSE_HelenFormer_MSE_Helen
2.4K posts
edited 30 November -1 at 1:00AM in Savings & Investments
"A further £50 billion was injected into the economy today as the UK struggles to pull out of its double-dip recession..."
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  • SallyGSallyG Forumite
    850 posts
    I'm struggling to understand QE.
    Can anyone spell out as for a child what actually happens step by step when QE happens ?
    The closest I can get to why the Bank of England does it is that it puts money into the hands of people who will use it to "kick start" the economy - who are they and what do they do with the cash?
    Who pays and who receives and what difference does it make - are we talking only about government gilts ?
    My weak grasp on gilts is that people buying gilts are lending money to the government for a fixed amount of interest over a fixed term and without risking the original investment - is QE the government giving gilts to someone - if so - to whom and why?
    When QE happens [why] does the price of gilts go down and [why] does the interest paid on gilts go down?
  • MoneySaverLogMoneySaverLog Forumite
    3.2K posts
    More likely the banks horde the money in their vaults. Nobody wins, inflation hits the roof and interest rates remain low.

    This government are a bunch of %^%^*(D(W)
  • Ken68Ken68 Forumite
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    Ditto Sally, will some knowledgeable reader explain the nitty gritty.
    Do the banks get this money???
  • oldvicaroldvicar Forumite
    1.1K posts
    When QE started, reports were all about "pumping money in to the economy", and it was supposed to be a Good Thing.

    As more and more QE happened, it was recognised that it brought interest rates down generally - a Good Thing for borrowers and the government, but for savers then it was a Necessary Evil.

    Now the reports are still about how savers and pensions are losing out, but the concern is not merely the percent or two shaved off savings rates as a result of QE (and the banks not needing depositors money so much), nor the great reduction in annuities. No the concern on behalf of savers and pensions is now 'the policy of keeping inflation higher than is should be'. Losing a percent on a savings account is a shame, but the ravages of high inflation are devastating. It's still great for borrowers and the government, but for savers more QE is now plainly just Evil.
  • bigadajbigadaj Forumite
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    Well inflating away all the debt is all part of the strategy as far as I can tell.

    I think it would have been justifiable if the sums involved had been usefully used for investmentm in the wider economy. Instead they have just offered the big banks an opportunity for arbitrage, and seemiNgly a semi covert way of giving them some money for free, and reinforcing their balance sheets.

    At the end of the day it is still debt to me, the bank of England prints money to buy government bonds that have to be paid back at some point; its all ok because any problems with the boe and the government will step in!

    Can't understand why the markets and outside investors aren't more spooked, unless they are even more fearful of the consequences of not doing it, and the fact that most governments are competing with each other , to stimulate their economies and force their currencies down. All a Sad inditement of the economic state we are in.
  • edited 5 July 2012 at 6:49PM
    Pinner_RamPinner_Ram Forumite
    49 posts
    edited 5 July 2012 at 6:49PM
    Quantitative easing explained (feel free to point out if I get anything wrong here)

    Bank of England buys gilts (1)

    This extra demand for gilts (2) pushes prices of those gilts up

    As the price of a gilt rises, the yield on those gilts falls(3)

    Gilt yields are used to value final salary, also known as defined benefit, pension scheme liabilities (4)

    Although most final salary pension schemes will own gilts, the effect of the rising value of those gilts is insufficient to offset the much bigger increase in the liabilities valued using the yield to arrive at today’s value for those future pension payments

    So:

    Interest rates fall - prudent savers, and people beginning to draw their money purchase/defined contribution pensions, (by buying an annuity) are penalised

    Interest rates stay low, people (and governments) who have borrowed too much have an easy (for now) ride

    (1) BoE does not print cash but simply debits an account it creates for the purpose.

    (2) Gilts are (were) pieces of paper representing debt owed by the government

    (3) because the fixed income (coupon) they pay is lower as a proportion of the cost of the gilt now it’s been forced up

    (4) pension scheme liabilities are the cost of paying pensions to pensioners when they reach the age at which they can draw their pension (sorry, a lot of “pensions” there)
  • bigadajbigadaj Forumite
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    Pinner ram, it's actually worse than that as it affects most pensions, not just defined benefit, because the annuities that people buy at retirement are controlled by the gilt prices in terms of return, so pensions lower for anyone who buys an annuity.
  • Pinner_RamPinner_Ram Forumite
    49 posts
    bigadaj - I've amended my post to make it a bit clearer that it is not just DB/FS that's affected, though I think you may have misread what I put, I did not say it was just DB/FS that was impacted.
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