Bank of England - Quantitative Easing

Image courtesy of unsplash.com

What is the situation?

Following the £200 billion bond purchases it declared in early March, the Bank of England has announced the decision to increase and further the quantitative easing by another £125 billion on June 18th, 2020.  This comes as a decision backed by the Bank of England’s Monetary Policy Committee voting in favour of increasing quantitative easing and ensuring that the interest rate is kept at the record low 0.1%.

Initially, the emergency meeting called in March had stabilised the UK economy through the initial purchase of bonds. However, the amount earmarked by the Bank is predicted to run out by next month. Due to this, the additional £125 billion announced will be injected at a far slower pace. Nevertheless, the decision reflects the continuing unease about the length of the economic recovery despite the prediction from Morgan Stanley suggesting a ‘V-shaped recovery’. 

What are the implications?

The aim of such a move is to bolster the economy through keeping the interest rate low in the UK. In doing so, the borrowing costs within the UK are kept low thus encouraging businesses and individuals to spend more money as saving is now much less attractive. Therefore, the hope is that as businesses reopen and lockdown begins to loosen, the improved access to cheap money can enable the UK economy to recover at a faster rate.

 However, the actions of the Bank of England will subsequently lead to higher tax and inflation in the near future to mitigate the losses sustained by the government during the coronavirus pandemic. Therefore, there is a risk of demand within the economy not increasing despite the government’s intentions through the phenomenon known as Ricardian Equivalence. This is where the assumption of higher tax and inflation leads to a little increase in demand in the present. Furthermore, this economic theory may be exacerbated by the worrying contraction of the UK economy by a dizzying 20.4% alongside the 600,000 workers left without jobs between March and May.

The Legal Implications

Indeed, if economic activity is bolstered in the manner which the Bank of England strives for, there will be a subsequent increase in litigation and M&A activity. With UK interest at a historic low as well as the Pound Sterling being down 0.92 per cent against the US dollar at $1.2438, there is a potential for US companies to merge or acquire UK businesses. Therefore, M&A activity could be set to increase despite the implications of the pandemic. 

Perhaps, the momentum of M&A activity brought on by Alphabet, Amazon, Apple, Facebook and Microsoft announcing 19 deals this year (representing ‘the fastest pace of acquisitions to this date since 2015’ as noted by Refinitiv data) will be maintained.

By Bobby Zhu