Bank: QE kept UK economy going

Julian Harris
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THE BANK of England will this morning talk up the success of its original quantitative easing programme, in a move which will be interpreted as increasing the chances of further asset buying to boost the economy.

The Bank’s £200bn asset-purchases made in 2009 “may have raised the level of real GDP by 1.5 per cent to two per cent,” the Bank’s latest quarterly report states – concluding that the effects of the policy have been “economically significant”.

The report also estimates that QE hiked consumer price inflation “by between 0.75 to 1.5 percentage points”.

The Bank’s QE was kicked off in early 2009 after its monetary policy committee “judged that without additional measures nominal spending would be too weak to meet the two per cent CPI inflation target in the medium term.”

Yet since then CPI inflation has ballooned to over two and a half times the target rate. CPI hit 4.5 per cent in August, and is widely expected to top five per cent in the coming months due to rising energy bills.

The Bank’s failure to forecast the inflationary pressures that have hit UK households was criticised by economists at its monetary policy roundtable, according to minutes of the meeting published today.

“Inflation had been high, had consistently surprised on the upside and was a key factor in eroding real incomes,” the minutes state.

Economists at the event also warned of a risk “that additional external price shocks would erode disposable income further”.

Stubbornly high price pressures could dampen the Bank’s prospects of a second phase of quantitative easing (dubbed QE2), analysts have said.

The minutes of September’s meeting of the monetary policy committee (MPC), released this Wednesday, are expected to reveal whether the nine-man rate-setting group is moving closer to loosening policy.

The first phase of QE could have been the equivalent of a further 1.5 to three percentage point cut in interest rates, according to an estimate in today’s report. Bank rate has been kept at 0.5 per cent since March 2009.

Bank governor Mervyn King dropped strong hints last month that more easing could be on the agenda.

The case for QE2 was endorsed over the weekend by business secretary Vince Cable. Speaking at the Liberal Democrats’ party conference in Birmingham, Cable cited the UK’s “demand problem”, saying that more QE should commence “quite soon”.