In response to heightened geopolitical disruptions and escalating energy costs, the Bank of England (BoE) convened emergency policy sessions to mitigate the risk of a deep contraction. While the Bank Rate was increased to combat immediate supply-side cost pressures, the BoE simultaneously expanded its reinvestment strategy under the Asset Purchase Facility (APF) to inject £120 billion into UK gilt and high-grade corporate bond markets. This intervention aimed to prevent credit market freezes and insulate the domestic economy from a deflationary spiral once transitory price spikes subsided.
By late 2024, the macroeconomic landscape had shifted. Due to persistent core inflation, the BoE raised the policy interest rate to 5.25%. Consequently, government borrowing costs increased, with 10-year UK gilt yields rising to approximately 4.6%, highlighting the vulnerabilities of sovereign debt without active central bank intervention. This volatility threatened to create credit bottlenecks across the financial system.
The BoE's reliance on quantitative easing (QE) has faced growing criticism. Several prominent economists argued that massive asset purchase programmes during supply-chain disruptions merely generated excessive liquid reserves. This liquidity accumulated in commercial bank balance sheets or inflated housing markets rather than driving productive capital expenditure—leading to 'too much money chasing too few goods' when supply remained restricted.
Conversely, supporters of QE argue that these liquidity injections maintained credit flows and that inflationary pressures were driven by global supply-chain shocks rather than monetary expansion. They contend that without the APF interventions, the UK would have entered a severe liquidity trap.
Furthermore, escalating debt-servicing costs could constrain the government's ability to fund critical long-term supply-side reforms. This includes a planned £15 billion national carbon-capture network designed to transition heavy industries to low-carbon technologies and secure sustainable long-term economic growth.
With reference to Extract B, discuss the use of asset purchase programmes (quantitative easing) in preventing a deflationary recession.
