Bank Of England Likely To Print More Money As Economy Slips

Bank Of England Likely To Print Money As Economy Stalls

The Bank of England may be preparing to print even more money before the spring in a bid to pull the UK economy back into growth, according to analysts.

The minutes of the bank's Monetary Policy Committee (MPC from its meeting earlier in January show that policymakers remain concerned about the future of the UK economy. While the consensus was that there was no need to expand on the last programme, launched in October, several members see that the downside risks to the economy remain, and that the bank might need to launch more asset purchases.

On Wednesday, the Office of National Statistics (ONS) released figures showing that the UK economy actually contracted in the last quarter of 2011. This, coupled with worryingly poor performance in the retail sector and a fall in inflation, may prompt another round of quantitative easing (QE).

The European Central Bank's (ECB) pre-Christmas programme of cheap short-term loans to eurozone banks showed the potential impact of pouring liquidity into the markets. However, with yields on the UK's bonds already low, the actual effect of buying gilts could be limited.

"Any further QE would not have a significant impact given the already very low level of yields. However, that is not to say that the Bank of England shouldn’t expand QE because some modest extra help is better than nothing," Rupert Watson, head of asset allocation at Skandia Investment Group, told the Huffington Post UK.

Analysts have long debated whether QE actually works, and under what circumstances it should be used. The principle is that the central bank prints money and buys gilts, which are perceived as low risk instruments and tend to be held in higher proportions by banks in times of uncertainty. The money that is freed up in those private sector banks is then supposed to be re-invested in higher risk loans to businesses.

That, however, is not always the experience.

"Evidence about the effectiveness of QE is mixed. By supporting asset prices during intense financial market stress in 2009, QE helped to stabilise investor sentiment and lowered the government's and large firms' borrowing costs," Neil Prothero, lead UK analyst at the Economist Intelligence Unit said in an email.

"However, funds were largely redistributed within the financial sector, including commodity speculation, which indirectly boosted inflation (and thus weighed on domestic demand) through higher import prices.”

The redistribution of capital into "real economy" businesses by banks is contingent on them actually lending to businesses - never a given - and the enterprises themselves finding opportunities to invest. Many larger companies are known to be holding relatively large cash reserves, choosing to hold back on spending it until there is more certainty over the domestic and global economy.

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