THE Bank of England has defended its policy of quantitative easing, arguing that the £200bn asset-buying programme successfully propped up the money supply following the financial crisis.
“Sectoral evidence suggests that asset purchases are broadly working via the balance sheets of households and companies to contribute to an increase in nominal spending,” the Bank said in its latest quarterly report, published today.
At the start of the recession, banks licked their wounds by repairing capital and liquidity positions on balance sheets. Such banking sector stabilisation prompted a “negative shock” to the money supply to the tune of £160bn, the Bank estimates.
Along with post-credit crunch caution over lending, the reduction in money movement was “offset by the positive impact of asset purchases on broad money.”
The Bank’s monetary policy committee (MPC) undertook the purchasing of assets “in order to increase nominal demand and so inflation,” the report says.
The Bank also noted a sharp uptick in velocity – the speed of money circulation – which some analysts have claimed could hold an inflationary threat for the UK.
“Velocity has indeed picked up, climbing 2.1 per cent during 2010 – the largest annual rise since 1979,” said Henderson’s Simon Ward.
The sudden upturn “is in contrast to the long run downward trend observed in velocity since the 1980s,” the Bank’s report says.
Meanwhile, banks remain ahead of schedule in their repayments of loans made under the Special Liquidity Scheme in 2008. Over £94bn of the £185bn has already been repaid.