The Bank of England could be set to inject a further £50 billion into the financial system in a second round of “quantitative easing” - printing money to buy back gilts and free up capital for banks to lend.
One member of the bank’s Monetary Policy Committee (MPC), Adam Posen, has previously voted alone for more QE, but the minutes of the last MPC meeting show that others are close to supporting him, as the UK economy shows more signs that it is stagnating.
Wednesday saw the UK’s growth figures fail to meet even the modest 0.2 percent forecast for the quarter, and signs of a consumer slowdown in the results of the country’s retail giants Tesco and Sainsbury’s, as well as the protracted crisis in the euro zone, are weighing on fears that Britain could slide back into recession.
Graeme Leach, chief economist at the Institute of Directors, said after the figures were released: “The GDP revisions make a very strong case to launch QE2. Firstly because they show just how perilous the recovery was in the first half 2011, and secondly because the back data also shows the recession was deeper than previously thought, with the implication that the output gap is still large enough to exert downward pressure on inflation. More QE is on the way, the only question is how much.”
“An immediate resumption [of QE] is very possible, in light of the weaker GDP data, escalating strains in the global banking system and the systemic threat posed by the calamitous failings of euro zone policymakers,” Neil Prothero, economist at the Economist Intelligence Unit, said. “Whether the Bank is privy to any information on an imminent Greek default could also be a key factor. Should the MPC opt to hold firm this month, we believe it is almost certain that it would announce an additional £50bn-100bn of QE at its next meeting in November.”
There is a bigger question, however, of whether money printing works to stimulate the economy. Injecting more cash into the system has an inflationary effect, and its critics say that its effect on real GDP growth is minimal, as banks are slow to pass on the capital to businesses.
The Bank of England made £200 billion of bond purchases between March 2009 and February 2010, and said in its quarterly bulletin in September 2011 that its first programme had resulted in a two percent rise in GDP and a 1.5 per cent increase in inflation.
The EIU’s Prothero is among those unsure of the benefits.
“We remain very sceptical... as to how effective the policy - in its standard form of gilt purchases - will be in helping the real economy under the current "liquidity-trap" conditions and given a dearth of investment opportunities: longer-term borrowing costs for the government and many firms are already low, credit demand from overleveraged borrowers is understandably weak, and further artificial support of asset prices will do little to aid the structural rebalancing of the economy,” he said.