The Bank of England’s somewhat unexpected move to inject more liquidity into the economy pushed the FTSE up a little before it then fell back and the prices of gold and silver rose very slightly. Sterling fell of course.
Although the Monetary Policy Committee held the base rate at 0.5% the rate set in March 2009, it has decided to inject another Â£75 billion into the asset purchase programme over the next four months, which will take it to Â£275 billion.
Speaking on Bloomberg David Blanchflower, an ex MPC member and arch dove, said that the BoE MPC decision was an inevitable result of the disappointing growth figures that came out of the Office for National Statistics yesterday. But he also said that the decision of the ECB to hold rates at 1.5% was incompetent and inexplicable given that there is no danger of inflation.
The MPC says that the slackening of the rate of global expansion has hit the UK’s export market threatening our recovery.
They also say that CPI inflation, which is at 4.5% is likely to rise to over 5% but then fall back sharply to below the 2% target in the ‘medium term’.
“While the stimulatory monetary stance and the present level of sterling should help to support demand, the weaker outlook for, and the increased downside risks to, output growth mean that the margin of slack in the economy is likely to be greater and more persistent than previously expected.” Says the accompanying release.
Therefore, to address the growth issue now but also target the medium term inflation target a new tranche of quantitative easing will be undertaken.
So the BoE MPC sees this as a way of kick-starting growth. Well, if no-one in the UK has got the money to buy the ‘stuff’ that will be made as a result of this extra QE and our export markets are also on their uppers, then the question is where are we going to grow into?
More liquidity will hopefully make loans more available goes the thinking, more loans to people more stuff bought, more loans to businesses more people hired so more people can spend. Also more money for businesses to borrow to invest to grow. But who says that consumers and companies are crying out to borrow? Certainly not the prime minister David Cameron speaking at the Tory conference.
Anil Stocker, Co-Founder and Director of MarketInvoice commenting on QE2 said "The Bank of England's decision to increase Quantitative Easing by Â£75bn shows the deep concern for the UK economy's stalling growth. However, while QE2 might inject additional liquidity in the banking sector, George Osborne's conference speech shows how little faith the Treasury has in the banks' ability to efficiently allocate additional liquidity. Without an efficient distribution mechanism, it is hard to see how QE2 will help small business funding. It might help lift confidence on the stock market, but the direct effect on SME lending is less obvious."
Has QE worked for the UK before? It first started in March 2009 and was then increased on 5th November 2009 by Â£25 billion to Â£200 billion. Well it has got us where we are today and I leave it to you to make your own mind up on how successful it has actually been.
For my money all that it did was keep the banks in work and the bonuses flowing.
Andrew Smith, KPMG’s Chief Economist, commented “Now the MPC has decided that the weak economy warrants another round of QE, it is likely to prove just the first instalment of a larger injection. With the government still intent on rapid deficit reduction, consumers constrained by shrinking real incomes and our major export markets experiencing similar headwinds, a sizeable monetary expansion may be the only instrument available to support demand for the foreseeable future.”