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 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.


Comments 5 of 318



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