Quantitative easing to continue

So just if we didn't know that the UK economy was teetering on the brink,this lunchtime's news that the Bank of England is to inject a further £50bn into the economy through the mechanism known as Quantitative easing.

Announcing that interest were to continue at 0.5 per cent where they have been now for over three years,the measure now takes the total asset purchases that the bank has made from £275bn to £325bn since it first introduced the measure to ward off the threat of fiscal meltdown.

The critics are still out on this policy.It is technically printing money and putting it back into the economy which can lead to inflation,if demand was increasing but the fact that it hasn't and that the Bank of England continues to do it, merely illustrates the dire situation that we are in.

It is worth reading Daniel Knowles piece on the Telegraph blog where he explains the economics behind it

The reasoning behind the Bank's move you can read Here but suffice to say that the bank has concerns that the underlying pace of recovery slowed during 2011, with activity falling slightly during the final quarter.

Some recent business surveys have painted a more positive picture and asset prices have risen. But the pace of expansion in the United Kingdom’s main export markets has also slowed and concerns remain about the indebtedness and competitiveness of some euro-area countries

The end of quantatitive easing-at least for the moment

Today's other main news is that the Bank of England has decided against extending its quantitative easing.

The scheme whereby £200bn of asset purchases were introduced to add liquidity in the financial markets will be put on hold on the basis that the economy is coming out of recession.

The bank made the announcement at the same time that it held interest rates at 0.5 per cent.

The scheme,the purchasing of government bonds, or gilts, is widely lauded as being one of the reasons why the economy did not collapse into depression.But now that growth is occurring it could fuel inflationary pressures.

The danger is of course that with growth so weak,the move could simply push the economy back into recession.

As for interest rates,it is unlikely that there will be any upward movement until the fourth quarter of the year as the bank of England will want to see signs of convincing above-trend growth perhaps two successive quarters.

The final throw of the dice?

So as expected the Bank of England has cut interest rates to half a per cent and has announced plans for quantitative easing amounting to £75b.

Interest rates have now been cut six times since October but their cutting has had little effect on the bank's willingness to lend money and has irked those that rely on the returns savings and investments for income.

This new policy will be a last chance to kick start the money supply and those green shoots.

The day for quantitative easing

So it seems likely that the Bank of England will announce the beginning of quantitative easing after recognising that interest rate policy will not work if the money supply is not there.

Quantitative easing is quite simply printing more money to increase the money supply to encourage spending.

It is not physically printing money but involves the bank buying up assets from the banks usually government debt to free up some of the money supply.

Edmund Conway writing in the Telegraph this morning says that we are still a long way from the depths of the recession

Yet for all the sound and fury, the full scale of the impact has yet to be felt. It will only be at the end of this year, when unemployment is closer to three million than two million, that we will truly know how it feels to be in the thick of a recession. Sir Fred Goodwin may consider himself a victim of unreasonable public recrimination now, but I dread to think how the revelation of his pension would have gone down six or eight months hence with 10 per cent out of work for the first time since the 1980s.

It is also likely that interest rates will once again be cut down to around 0.5 per cent.

It is a daring strategy.At its worse it could trigger hyperinflation but if successful it may well trigger the start of recovery.The measure though shows how deep this recession is

Bean unrepentant

This morning's FT carries an interview with Charlie Bean,the unfortunately named deputy governor of the Bank of England in which he says that

he is visibly energised by the challenges of dealing with a sudden loss of confidence in the economy.

Bean has had part of the blame for the current crisis laid at his door.Back in 2005 his vote tipped the balance for an interest rate cut but he is unrepetant

he estimates rates would have had to be 2 to 3 percentage points higher to have limited the build-up of credit and damped house prices and that would have had many other undesirable consequences for output and jobs.

He does however worry for the future

if every bank reins in its lending to viable companies, “the consequences are more failures, higher unemployment, lower demand, more defaults on loans, and that worsens the positions of the banks again”.

Come on Howard-cut the rate

One take on the Halifax's decision not to pass on interest rate cuts



Is Howard still working there?

Ht-Recess Monkey

Massive cut in interest rates

Something of a shock as the Bank of England has reduced interest rates by 1.5%

Now at 3% it is the lowest that rates have been since 1955 and the move must indicate how bad the Bank views the economic prospects.

The test now will be whether this rate is passed onto borrowers and as importantly savers as the banks have to attract funds as well as being lenders.

If the Bank wanted more evidence of the slump it had to look no further than the latest set of economic figures to hit the streets today.

New car sales down 23% year on year to October and construction orders down 19% on the year to September.

Time for a large cut in rates

The overnight news that Japan has made a rare cut in rates from 0.5% to 0.3% allied to a $51b economic package to boost its economy will no doubt lead to further calls for interest rate cuts here.

In this morning's FT,Martin Wolf argues that there must be a dramatic cut in interest rates here

It cannot make sense for US rates to be at 1 per cent, while the UK’s are 4.5 per cent. In present circumstances, I would like to see UK rates down to 2.5 per cent.

The negatives to this are further declines in sterling but Martin argues that

In current circumstances, this has to be ignored. In fact, determined action may strengthen sterling, not weaken it

For Japan its move was partly to reduce the value of the yen which is stiffling exports.

Finally though he asks

Both the Bank and the Treasury will also need to examine what they would do if official interest rates fell to zero. This looks highly likely for the US and is conceivable for the UK. That would be the moment for “helicopter money”, with cash sprayed around like confetti.

Global rate cut-an unexpected bonus

Have been busy during the morning so have just picked up the welcome news that interest rates have been cut 0.5% in a coordinated move across the big central banks.

Along with the Federal reserve and the European central bank,this coordinated move is intended to show that the world can globally work together during this crisis,a premise that has not always seemed possible in the last few days.

Rates in the UK are now at 4.55 and the bank will hope that these are quickly passed onto borrowers in the form of lower mortgage repayments.

The action comes on the same day that the IMF has forecast that the world economy is heading into recession.According to BBC online

the IMF said global economic growth would slow to 3.9% this year and then to just 3% in 2009 - its lowest level since 2002.
The IMF said the global financial crisis, which started with the collapse in US sub-prime mortgages in August 2007, had worsened in the past six months - and had entered a "tumultuous new phase" in September.

2 million out of work but how much room for manoeuvre does the Bank of England have?

This morning brings more bad news on the economic front on the front page of the papers.The Independent going with the grim prediction from the monetary committee's David Blanchflower
who says that if base rates don't come then we could be looking at 2m on the dole by Christmas.

"People have to start to respond to the fact that we are in a recession and the danger is we'll be in a very serious and long-lasting recession unless we do something. This is a call to action." reports the paper.

Yet its room for manoeuvre may be limited.Most predictions see inflation falling next year which will give the Bank Of England some leeway.But there is another area that needs to be addressed and that is our falling exchange rate against both the Dollar and the Euro.

The weakness comes from the financial communities lack of confidence in the British economy but conversely it is also allowing for a fall in interest rates which means that its returns on sterling will fall.However the double whammy in all this is that the exchange rate will lead to higher inflation as it increases the cost of imported goods.This figure is currently running at over 8% and may well prevent a lowering of rates.

Whatever the outcome,the picture looks gloomy.Yesterday's report on falling house prices suggest that this may be more than the mere correction in the market that many analysts thought was needed.The figures on new mortgages,barely a quarter of what they were last year will lead to job losses not only in construction but also in financial services and estate agents.Both of these have supported the economy during boom times

IMF warning leaves no room for manoeuvre

The IMF's warning to the country this morning shows what little room for manoeuvre the monetary policy committee has for altering the level of interest rates this morning.

It has reduced its growth forecasts to 1.4% this year and 1.15 for next year and warns that inflation could well tip 5%

"So far in 2008, evidence points to a sharp slowing in activity alongside high inflation "Second-quarter growth was weak, forward-looking indicators are gloomy, sterling money market spreads remain elevated, unemployment has edged up and house prices are falling rapidly."

On top of that it warned that the government was in danger of losing credibility if it made a too-drastic revision of the fiscal rules.There have been rumours of it moving the goal posts to breach the magical 40% of GDP figure

Panic stations or solid policy?

The Bank of England's decison to cut interest rates this lunchtime to 5.25% suspense was no doubt a response to the credit crunch and the recent fall in stock markets.

Is it sensible economic policy?Well perhaps this knee jerk reaction by the bank has more to do with instilling confidence in the great British public rather than any sound long term economic planning.

According to BBC online news,its accompnying statement said

"Inflation at 2.1% in December was close to the 2% target, but higher energy and food prices are expected to raise inflation, possibly quite sharply, in the coming months."

adding that

The Committee needs to balance the risk that a sharp slowing in activity pulls inflation below target in the medium-term against the risk that elevated inflation expectations keep inflation above target

I always doubted the inflation figures,but surley all this cut is going to do is to once again fuel credit growth and house price inflation,things that got us in this mess in the first place