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 Article written by Stephanie Flanders Stephanie Flanders Former economics editor

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  • rate this

    Comment number 318.

    @ 314 Marylyn. I'm not saying growth and employment aren't necessary. They are. But I'm too old to wait for current monetary policy to work - supporting bust banks; supporting asset prices; trying not to burst the bubble. People reducing debt & not spending right now ? Sure they are. But for how long? "Right now" has been going on for over 3 years already. Another 27 years to go?

  • rate this

    Comment number 317.

    316 TIexP

    Those who not careful have been burnt with debt fed by banks seeking commission for short term profits

    Those who have been burnt but havent had 3rd degree burns now debt adverse

    Banks have been told to be responsible = liable

    Banks know property has to drop in price so condition mortgages

    Those who were careful remain careful

    314 Marylyn is correct & HMG seeking LESS job security

  • rate this

    Comment number 316.

    @3I2 I ask myself why consumers who are not in debt are not spending more. My spending is flat because I choose it to be flat because there's a financial crisis on. I'm not spending more until interest rates rise.

    In any case, borrowing more to get us out of a problem caused by too much borrowing doesn't sound like a good idea to me
    So QE aimed at more borrowing doesn't sit well with me.

  • rate this

    Comment number 315.

    311 TIexP

    Look at EZ debt graph re gov debt above 90% of GDP and trends

    Take a look at Rogoff re debt over 90%

    Further consider 6 to 7% on gov debt is regarded as unsustainable & now has triggered episodes in EZ & look at trends in yields

    Its not rocket science, its kids playing with explosives

  • rate this

    Comment number 314.

    310.The Itinerant ex-pat - But, as Steph said, it has not, thus far, encouraged borrowing and spending

    If the BofE/economy wants that, something has to be done about job security. No one with their head screwed on correctly would borrow and spend if they can't guarantee a job. People are happier paying down debts than spending right now.

  • rate this

    Comment number 313.

    311 TIexP

    QE is a finger in the dyke to keep things working now & to mitigate destruction

    We have not seen austerity yet

    The debt overhang reduces with inflation and if property prices are nominal then they realign in real terms

    They will have to move to infrastructure investment and deal with the young unemployed

    The EZ process is the issue as Greece will leave & possibly others (likely)

  • rate this

    Comment number 312.


    Immediate attempt to is to stabilise the situation which is still vulnerable

    Why should overextended consumers borrow

    Why should business invest when consumer spending is flat

    Consumer spending is flat due to private debt

    Parliament, banks & business offshoring have destroyed creditability so individual risk taking is now low

    You reap what you sow A credit crunch is about zero trust

  • rate this

    Comment number 311.

    310+ Without QE (& without near-zero base rate). We would have - More spending from savers. Banks in even more trouble. Depressed equities, bonds & property. More repossessions & bankruptcies.
    Sounds like a better alternative to me because we could start to climb out of this mess sooner rather than later - like 30 years later!

    Of course, I could be wrong- just like Mervyn.

  • rate this

    Comment number 310.

    @297 It depends what u mean by working, Arthur. It has supported Banks, kept interest rates low, supported asset prices, impoverished savers and pensioners and made the 1% even richer. But, as Steph said, it has not, thus far, encouraged borrowing and spending. IMO Merve has scared the population into borrowing less and not spending more. Fear & greed are the drivers. The 99% are scared $h!tless

  • rate this

    Comment number 309.

    Pointless, the money will end up in bank coffers and not in the hands of business to invest.

    Thats the whole point of QE, the money must never go into the real economy, just sit on the banks balance sheets, the idea is that it allows the banks to lend other money but the only time it really works is if interbank lending completely dries up, which is not currently the case

  • rate this

    Comment number 308.

    The SFO investigation.

    It will take time. During that time NOTHING else can, or will be done.

    The SFO reference is yet another form of prevarication, just like the parliamentary inquiry. Both running at the same time is the very best possible way to do absolutely nothing - the ideal Treasury position.

    In this time the BoE prays (they are quite religious) that a miracle happens.

    We're stuffed!

  • Comment number 307.

    All this user's posts have been removed.Why?

  • rate this

    Comment number 306.

    Where exactly, do we get the money for QE. We cannot possibly be borrowing it from the banks? Can we?????

    The BofE as currency issuer, doesn't borrow it, it creates it, the rules for QE mean that at an appropriate point they have to destroy an equal amount. neat trick, unfortunately QE doesn't (except in very limited circumstances) encourage banks to lend so its all a waste of time

  • rate this

    Comment number 305.

    Pointless, the money will end up in bank coffers and not in the hands of business to invest.Sorting out late payments will have more effect.

  • Comment number 304.

    All this user's posts have been removed.Why?

  • rate this

    Comment number 303.

    28. Sir Algernon Frayed Cuffs

    "The BOE really hates savers, I suppose not being reckless with money is looked upon as sacrilege to them"

    Debt and servitude is the in thing. Freemen are irritants and will be treated appropriately.

  • rate this

    Comment number 302.

    As Stephanie is choosing to call this QE3 instead of QE4, I should have refered to QE3i in my post at 301.

    But Steffie, more to the point: is this latest dollop of QE3 ring-fenced for SMEs like its predecessor?

  • rate this

    Comment number 301.

    QE1 appeared to work in giving the banks much needed reserves. QE2 (at the time of QE3) had not been done; the structure for it was found to be complex, IIRC, and had not been put in place. QE3? It is too soon to say apart from some SMEs claiming they cannot get finance. We do not know how much has actually been taken up.

  • rate this

    Comment number 300.

    to get out of this mess
    we need a reversal of ideology back to the post war settlement
    and a willingness for the only people with the power to achieve this
    the treasury to use it
    luckily new powers are now available that were not available in 45
    the end of bretton woods and the liberation of a true fiat currency
    as QE shows new sources of investment are available
    public infrastructure projects

  • rate this

    Comment number 299.

    292. Walter
    "Where exactly, do we get the money for QE. We cannot possibly be borrowing it from the banks? Can we?????"
    I'm afraid you were right first time, Gov lends to banks at 0%, banks buy Gov bonds (lend to Gov at 4?%).
    Banks appear solvent when they aren't, Gov appears able to borrow. Bank keeps the profit, Ponzi scheme continues as the banks rob us. Trebles all round!


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