[yuan43]

It's a move designed to affect market psychology mainly. Multiple central banks have concluded that QE at best contributes marginally to the reduction of long term interest rates. People want something to be done, and BoE delivers.

It also shifts the discussion from "what's causing the fall of the pound and the rise of long term rates" to "what will be the effect of this new round of QE?"

To get a better picture, take a broader view. This move comes as all of the world's currencies are falling against the dollar. Why?

This article might be helpful:

https://www.lynalden.com/global-dollar-short-squeeze/

[ctrlmeta]

Can you explain what QE is and how long term rates are connected? Do you mean that the fall of pound is inevitably going to require UK banks to increase interest rates to make pound more attractive to investors?

And what's the problem with increasing interest rates? Is it that rising interest rates makes new businesses difficult to borrow money? And difficulty in borrowing money leads to shrinking economy?

[bko]

Interest rates are the price of money. Its how much you have to pay to borrow money. If there is a lot of money in the system, interest rates are low, and vice versa.

Interest rates are also inversely correlated with price. For instance, if I buy a bond that pays 5% for $100 and tomorrow someone can lend money at 6%, no one is going to pay $100 for a bond that's paying only 5%. If they can lend money now only at 4%, they'd pay over $100 for the bond paying 5%.

BoE is going to be buying a lot of bonds, which means the price is going up (increase in demand) and others will pile in. And since price and interest rate are inversely correlated, that means yields (interest rates) are going down.

Similarly if interest rates go up, the bonds that banks and pension funds hold will go down in price (inversely correlated). But the downside is there's more money in the system, cheaper credit, more inflation and decrease the valuation of the currency relative to other currencies.

[than3]

Historically, interest rates must rise to the same rate of inflation to reduce inflation.

If they don't rise fast enough you get stagflation where businesses not willing to shoulder the cost of governmental mistakes reduce their production and lay people off creating high unemployment in an inflationary environment. This however, is only a brief stay before deflationary forces put you into a deflation death-spiral.

Failing to raise interest rates, and increasing paper printing creates hyper-inflation. As the currency debases, costs rise in a cost-push inflation environment (starting at the producer level), and inevitably the division of labor breaks down with social unrest (Zimbabwe, Weimar).

Ray Dalio has published a book series on how historically these debt crises play out. Its been fairly accurate. Its a normal cycle, usually happening towards 100 years after a fiat currency is adopted, though that timetable can be faster with malfeasance and fraud.