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

£75b more to be put into quantitative easing as Bank of England worries over bleak situation

In the wake of more bad economic news this week,the Bank Of England has announced that it will be pumping more liquidity into the country through quantitative easing

Its monetary policy committee announced that an extra £75b will be made available,as well as keeping interest rates at their current 0.5 per cent level.

The bank in a statement have said that the pace of global expansion has slackened, especially in the United Kingdom’s main export markets.

Adding that vulnerabilities associated with the indebtedness of some euro-area sovereigns and banks have resulted in severe strains in bank funding markets and financial markets more generally. These tensions in the world economy threaten the UK recovery.

The Committee expects the announced programme of asset purchases to take four months to complete. The scale of the programme will be kept under review.


Graeme Leach, Chief Economist at the Institute of Directors, said of the move:

“What did we want? More QE. When did we want it? Now. Near zero GDP and money supply growth made a compelling case and the Bank of England was right to launch QE2. It could be argued that the Bank of England was slow to introduce QE the first time, but thankfully it hasn’t made the same mistake twice.”

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.

Doubts over QE

It is difficult to understand what the Bank of England's decision to raise the stakes in the quantitative easing measures actually signals for the economy.

Yes the £50b expansion in the next three months will no doubt stimulate demand in the economy and yet does it signal that the downturn is worse than expected?

The bank, which left interest rates unchanged this lunchtime, says that it is still concerned with the world wide banking system.

“The world economy remains in deep recession,The global banking and financial system remains fragile despite further significant intervention by the authorities.”

The gilt market was certainly taken by surprise by the announcement as the move brought a hike in the price of government bonds.

There isn't as yet any definitive proof that the measures are working although next week's inflation figures will give a better indication but today's measures surely indicate that the bank itself is not convinced.

Over at the Times,David Wighton believes that the bank should

turn its focus from buying gilts to buying corporate debt, which would have a more direct impact on the credit markets.

Between a rock and hard place

That is Fraser Nelson's analysis of the position of the Chancellor in his News of the World column thus morning.

He has two problems. A collapse of tax revenues—and a Prime Minister who wants him to spend even MORE.

However according to Fraser he is fighting his corner.Amidst rumours this week of splits between the treeasury and No 10

Darling’s message to No10 is simple: “Sorry, there’s no money.” Brown replies: “Well, tell the Bank of England to print some then.”

And the Chancellor is worried,

He knows just as there’s no such thing as a free lunch, there’s no such thing as free money.

Against quantitative easing

The arguments for and against quantitative easing will continue no doubt.

This from the Adam Smith institute not surprisingly comes out firmly against it

Purely in theory, it sounds possible. An omnipotent and omniscient central bank could perfectly replace the lost money supply, prevent deflation, and stabilize the economy. But unfortunately no such central bank exists.
The trouble is that monetary changes take time to work through the economy. It will be at least a year, for instance, before we can see the impact of the interest rate cuts. So it's really more or less impossible to get a policy like quantitative easing right. It might not have much impact (as in Japan). It might result in another inflationary boom a year or two down the line, followed by another crash like the present one. It could even result in hyperinflation, and the complete economic destruction that would entail.

Britain may lose its credit rating

Creating pounds out of thin air is no way to nurture faith in sterling. Purchasing tens of billions in gilts and stockpiling them in Threadneedle Street will eventually create a huge overhang that will unsettle future demand.

Patrick Hosking writes in this morning's Times

He is worried that following the decision to go down the route of quantitative easing the country may well lose its AAA credit rating

But as he points out

Losing the triple-A badge would be largely symbolic. Japan has got by without it since 1998. Canada went without for eight years until 2002. But Gordon Brown would be wise to stay indoors if and when it actually happens.

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