Bank of England sets sail with QE3

Bank of England Will the Bank's latest move have any impact on the economy?

No surprise that the Bank of England has opted to inject another £50bn into the economy. But, looking at what's happened to lending and other economic data since the Bank re-started quantitative easing last autumn, many in the City are wondering how much difference this extra liquidity is likely to make.

The Bank's monetary policy committee (MPC) voted to spend another £75bn on government bonds last October, and another £50bn in February - to make a grand total of £325bn since March 2009. The additional £50bn announced today will take it up to £375bn, though it's worth noting that the new money will be spent at a slower rate than before - over four months instead of three.

Some will see that slower pace as a hint that members of the MPC think this bout of easing will be less powerful than in the past - or perhaps that they are worried about possible negative effects of continuing the policy for so long. But the Kremlinology is less important than the fact that they have done it at all.

On the face of it, the Bank has not got a lot in return for the £125bn it has spent since the autumn, other than a pile of government IOUs.

The narrowest measure of the money supply - in effect, cash on bank balance sheets - has risen by 58% since September, as you'd expect when the Bank is handing their customers all that freshly created money in exchange for the purchased gilts. But there is not much sign of that getting out into the broader economy. Lending to households and companies has risen by just 0.2% in that time. (Thanks to Vicky Redwood, chief UK economist for Capital Economics, for pulling these numbers together for me. For those that care about these things, we're using the M4 measure of lending - excluding transactions between different parts of the financial system which otherwise distort the figures.)

Other things have also been moving in the wrong direction, from the Bank's standpoint. The pound has risen about 6%, on a trade weighted basis, since October, and the FTSE is only slightly higher.

Finally, borrowing costs for companies and households, if anything, have crept up. The Bank's own figures showed the average new mortgage rate creeping up to 3.75% in May, higher than in April and more than a third of a percentage point higher than at the start of the year.

Of course, you can blame the eurozone crisis for a lot of these unhelpful developments - maybe all of them. Without that extra liquidity sloshing around the financial system, Bank officials would say things would have been considerably worse.

As ever, the argument would be that the Bank cannot hope to control what is happening across the Channel, or prevent it from darkening the prospects for the UK. But it can do all it can to offset the upward pressure on bank funding costs and the downward effects on confidence. They would also point out that if their forecast shows inflation dipping below target in two or three years, the Bank can hardly sit on its hands.

All of that is true. But it is a striking reflection of our times that the MPC is continuing with more QE, three weeks after the Bank's governor and deputy governor admitted, in separate speeches, that asset purchases, on their own, were not enough.

Sir Mervyn King could scarcely be gloomier about the short-term outlook for the eurozone - and the UK. He repeated again recently that we were "only halfway through" the crisis - and warned that the economic situation had deteriorated dramatically in a matter of just a few weeks.

Yet, somehow, he and his fellow policy-makers at the Bank must convince the country, and the City, that more quantitative easing will meaningfully offset this gloom, and that further steps - like easing the liquidity requirements for banks, and the "funding for lending" scheme - will finally encourage banks to lend, and firms and households to borrow and spend. That's despite the fact that British banks are already holding idle liquidity worth around £500bn - about 30% more than regulators have formally required them to hold.

There might not be many other avenues open to our central bank in the current climate, but making that case is going to be a challenge, to say the least.

Stephanie Flanders, Economics editor Article written by Stephanie Flanders Stephanie Flanders Former economics editor

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  • rate this

    Comment number 18.

    QE1 didn't work nor did QE2 ...

    Depends what you mean by work.

    Stimulate the economy with in one bound we are free - absolutely not - still going the wrong way.

    Save the banks from actually going bust? - not even that!

    The Bank still has no understanding of the economics of money. There is too much of it about. Assets are far too far above their economically viable price.

    NO it won't work.

  • rate this

    Comment number 17.

    A new take on the revolving door!

    Money goes in from the Bank of England
    Money goes out in the pockets of CEOs and traders

    It could be said the banks are laughing all the way to the....but that would be frivolous. Give the money direct to businesses or to us-the taxpayers.

  • rate this

    Comment number 16.

    QE in its current form merely seems to help the banks and their balance sheets rather than the economy.

    My view is that it is a confidence problem requiring genuine stimulus in the form of subsidised works to kick start the economy - as much as I dislike these. Perhaps an imaginitive project such as Boris island?

  • rate this

    Comment number 15.

    Banks have been increasing lending rates charged to businesses & consumers, when their balance sheets are 30% larger than needed & BoE base rate is on hold. Why?

    You rightly question above whether a new bout of QE will succeed better in "flushing" money out into the real economy.

    Surely, we need "credit easing" - funding directly to companies, bypassing the banks; so "constipated" over QE?

  • rate this

    Comment number 14.

    " But there is not much sign of that getting out into the broader economy"
    Of course not. The public and business do not want to borrow any more money, and banks do not want to lend to businesses struggling to find customers. Generate real demand by printing money and giving it to the government to meet everyone's std rate income tax for the next two years. Then we will spend again.

  • rate this

    Comment number 13.

    Anyone heard about pump priming?

    How about taking just one billion of this and lending it to new startup businesses? Selected unemployed people with some experience could be given a chance by Jobcentres to prepare a business plan with the possibilty of,say, £10K on the table as startup funding for shops,workshops and tourist schemes. They'd pay it back in time,and the money could be used again.

  • rate this

    Comment number 12.

    We should make toilet rolls with numbers printed on each sheet. Each time you pull it another number appears to tell you how much you now owe. Sadly, the only way we could keep up to date is to suffer with the runs!

  • rate this

    Comment number 11.

    Guvnor of BOE shoulda gone to Specsavers....


  • rate this

    Comment number 10.

    I can't help but think that putting the money directly into the public's hands would be a better way to do this. Paying off household / credit card debt would help people and improve bank's liquidity ans would, at the very least, simulate consumer spending

  • rate this

    Comment number 9.

    As stated the banks are building a war chest of £500 billion partly made up of the money already printed by the BofE, but are not lending to businesses and individuals causing our economy to recede back into recession. Heres an idea, take the freshly printed £50 Billion and divide it amongst all UK adults. Some will bank it helping the banks and others will spend it helping the economy.

  • rate this

    Comment number 8.

    BoE launches 3rd round of stimulus = restart printing presses & buy £50B ($78B US) of asset purchases with newly created money TO HELP ECONOMY OUT OF RECESSION. I expected this after BoE Governor Mervyn King said economic outlook had deteriorated since 2cd round in May. BoE has bought £325B of gov bonds to date, & 3rd round will take total to £375B. What does he expect will change this time?

  • rate this

    Comment number 7.

    all this is designed to do is prop up banks, directly and indirectly by propping up house prices, and inflate away the govt debt.

    collateral damage to savers, and stupifying the economy into a long term veetative state is a side effect bonus

  • rate this

    Comment number 6.

    This must be helping someone, but as for the rest of the UK, this is as daft as a pair of three legged trousers , to quote a line from Blackadder.

  • rate this

    Comment number 5.

    Diamond resigns, severance package under discussion.
    BoE puts up £50bn.

    Probably only pays 1% tax as well.

    I'm sure it will trickle down though, Bollinger bottle recyclers could be in for a penny bonus this Xmas.

  • rate this

    Comment number 4.

    Once again the Bank bottles it - £50bn is chump change. The Bank needs to pump more QE in!

  • rate this

    Comment number 3.

    Thanks Stephanie & Vicky. Great analysis.

    Why are the banks' balance sheets showing 30% stronger than required by the new capital adequacy ratios?

    Why has the earlier QE not percolated down to the "real" economy yet?

    This analysis shows that the banking system - both retail and wholesale is causing a massive suffocating stranglehold on the entire economy.

  • rate this

    Comment number 2.

    The economy is flatlining because consumers have zero improvement in household expenditure YoY. Please explain how QE helps this because there is no sign of it so far. What is needed is a big UK infrastructure investment to stimulate with contract let to UK companies in the same way Germany predominately lets contracts to German companies

    All UK attention is focused on bank not growth

  • rate this

    Comment number 1.

    Despite not working, the BoE hold rates at record low for 40th month in a row, ECB cuts to its lowest ever at 0.75 and China has lowered theirs for the second time in a row.

    Barclays, & the others in the Libor scam, will end up with higher borrowing costs too, so handing them another 50bn will only plug a hole in their balance sheets as people pay down debt and don't borrow.


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