Monetary policy in the UK: Further QE

Poor growth of the UK's economy and scarce market liquidity played a very important role in the Bank of England's decision to print £75bn more in QE,  because the exposure of British banks to toxic sovereign debt freezes up their ability to lend money to consumers and firms. In the Eurozone, Banks are facing the same “illiquid” problem, that led the European Central Bank decision to the same decision, pumping additional funds into European Banks.

In the UK, The central bank will buy back gilts (bonds issued by the British government) with residual maturities of over 3 years, thereby pumping liquidity in the economy, that will result in increased demand for borrowing, increased output, and depreciation of the pound sterling (thereby making the UK's exports cheaper and imports more expensive). Wonderful.

But what will the result be on the inflation rate? George Osborne agreed with the MPC that in the medium term further QE will help keep inflation on target. But economics teach us that prices depend on the quantity of the money supply. If there is an increase in the quantity of money supplied, prices will increase proportionately. In an economy with increasing inflation expected to rise further, in which the average household is experiencing very tough times, with almost no money left after necessary expenses, unemployment rising (7.9% in September) http://www.bbc.co.uk/news/business-14912236 and interest rates at an all-time low (still 0,5%) making savings an unattractive choice because of low yields, at first impact it doesn't seem that QE is the best way to restore wealth in the hands of consumers. 

If inflation rises real incomes will decrease even more, that will decrease demand, and it will really not matter if business's will be able to borrow as much as they did before because there will be less demand for their products. If consumer expenditure falls, unemployment will rise, a process we have been witnessing since the beginning of the crisis in 2008, as firms cut back on costs to cope with eventual losses. If unemployment rises, more people will not be able to pay back their mortgages which increased because of low interest rates.

The last thing I want to see is Mortgage crisis 2.