Quantitatively more easing from the Bank

  • 9 February 2012
  • From the section Business
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The Bank of England has already injected £275bn into the economy - an amount equivalent to nearly 20% of Britain's GDP - but it seems a majority on its Monetary Policy Committee (MPC) thinks it is not enough.

As expected, the MPC has voted for £50bn more quantitative easing (QE).

There were critics lining up to say it's (a) too little; (b) too much; or (c) beside the point.

Realistically, it's difficult to sign up to all three. For example it's difficult (though not impossible) to argue that the policy is both impotent and inflationary. If it's courting inflation, then it must be doing something.

Speaking on the World at One on Thursday, Andrew Sentance, a former MPC member, stuck with his longstanding view, which is a mixture of (b) and (c): that the policy would do much for inflation, but not much for anything else.

Matthew Hancock, a former economist at the Bank and former chief of staff to the chancellor, was more circumspect. But he hinted (c) in his emphasis on the need for "credit easing" to get money flowing to ordinary businesses, in addition to anything decided by the MPC.

What about (a) - the argument that the bank ought to be doing more? You don't hear that so much today - though some were expecting an injection of £75bn, rather than £50bn. That is probably because the latest news from the real economy has been surprisingly good.

We found out today that the UK's manufacturing output in December was 1% higher than in November. And our trade deficit in that one month was the smallest since 2003.

Admittedly, the trade figures always swing around wildly, and this fall was due more to a fall in imports than any surge in sales abroad.

However, given that the eurozone supposedly slipped back into recession at the end of the year, it's good and surprising news that our exports to that region have been steady - in fact, up 1% in December.

It's also good that the UK's net trade with the rest of the world seems finally to be adding to domestic demand, overall, not sending it abroad.

Comparing the last three months of 2011 with the previous quarter, we've seen the UK's goods exports growing by 3.8%, while imports have fallen, by 0.6%.

All that said, the prospects for the next year or two are still weaker than they were four months ago, when the MPC decided to press the button on more QE.

At that time, the MPC expected inflation to be below 2% in a couple of years, even with the extra £75bn announced then. To judge by Thursday's statement, the forecast for inflation has edged up since then, but not enough to tip the balance against more QE.

Will this £50bn make a difference? The Bank must think it will. Its latest estimated show the first £200bn raised the real level of national output by up to 1.5%, and inflation by about 1.25 percentage points.

However, the margin of error around these calculations is pretty sizeable. And, if you've been looking for a mortgage over the past few months, you'd be forgiven for wondering whether the Bank had done you any good at all.

The yield on long-term (10-year) government debt hasn't really fallen since the last batch of QE was announced in October, but since July 2011 the government's cost of borrowing has fallen by around 1 percentage point, from just over 3% to just over 2%.

That's nice for the Treasury, perhaps. (And the taxpayer.) But in that period, the interest rate on the typical new mortgage has gone up.

Bank of England officials would remind us that we will never what would have happened to mortgage rates, without more QE. That's true.

But - as Andrew Sentence would no doubt remind us - the uncertainty goes both ways. We'll never know whether things would have been worse without QE - or better.

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