Is the Bank of England right to increase quantitative easing by a further £50bn?
The UK’s recovery continues to disappoint. So much so that we are back in recession, with output having contracted since last autumn. Among the G7, only Italy has seen a weaker recovery. With that in mind, the Bank of England needed to act this month, and act it did – its £50bn injection should help shore up the lacklustre economy and offset some of the downside risks blowing in from across the Channel. Quantitative easing supports the economy in a number of ways, such as by lowering gilt yields directly or encouraging investors to buy corporate bonds and shares – both helping cut borrowing costs for households and firms. The slowing world economy prompted four central banks – in the UK, euro area, Denmark and China – into action yesterday. While the effect of policy easing in such difficult circumstances is highly uncertain, it can only be positive for flagging growth.
George Buckley is chief UK economist at Deutsche Bank.
QE is the right policy tool if there is a shortage of money in the economy. There isn’t now – real M4 holdings of households and private non-financial companies rose by a solid annualised 2.6 per cent in the six months to May, the fastest growth for three years. Current economic weakness is the lagged consequence of a contraction in real money last year, caused by an inflation spike for which the Monetary Policy Committee (MPC) bears partial responsibility. With monetary trends consistent with a second-half economic recovery, more QE risks creating “excess” liquidity that will sustain a medium-term inflation overshoot and propagate new asset price bubbles. The MPC, instead, should take stronger action to ease credit constraints and lower banks’ funding costs and lending rates, for example by postponing required increases in regulatory capital and extending term repos from six months to three years.
Simon Ward is chief economist at Henderson Global Investors.