Cash injection for the UK economy could risk deflation

AN INJECTION of cash into the UK economy through quantitative easing could risk the economic recovery and lead to deflation.

Fathom Consulting has warned a fresh round of quantitative easing (QE) could become self defeating, as higher headline inflation, without an increase in higher wages, would ultimately be deflationary.

Analysts warned a fresh injection of cash could lead to higher food prices, and other commodity prices, but not matched by wages.

The position stands against the view of Bank of England Monetary Policy Committee (MPC) member Adam Posen, who has previously voted for QE to stimulate the economy.

Posen wants to put in an extra £50bn to the existing QE programme to a total of £250bn.

The Bank of England last week held the base rate of interest at 0.5 per cent and confirmed there would be no extension of quantitative easing to increase money supply.

But the US Federal Reserve has said its QE policy is working. Forecasts suggest the policy will keep inflation at one point higher and create 3m jobs.

Fathom Consulting view QE as successful at holding down both the dollar and sterling “so far”, yet say that the currencies “could rise once more”.

It also pointed to the unwillingness of countries like China and Brazil to allow their currencies to rise significantly against the dollar, which could undermine global growth prospects.

Fathom director Danny Gabay said: “The bigger risk for countries conducting QE remains deflation.”