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Stephanie Flanders | 10:22 UK time, Thursday, 9 July 2009

It's make your mind up time for the MPC. Either today or next month, the Bank of England's Monetary Policy Committee has to decide whether to continue with the current policy of "quantitative easing", or take a rest.

I don't know what will happen. There's a spirited debate within the committee on this, and I suspect the members don't know themselves.

In effect, the discussion comes down to this: do you think that QE is mainly about the quantity of money you put into the system - or the degree of "ease" that it provides?

Let me explain. One way to think about QE is as a topping-up exercise. Thanks to the recession, the Bank thinks that nominal GDP - the amount of national output in cash terms- is about 9% lower than it would be in "normal" times. That roughly corresponds to the £125bn the MPC is due to have spent by the end of this month (it's spent about £110bn so far).

If you thought QE was a one-off exercise to get the amount of cash flowing through the economy back up to more normal levels, and encourage similar growth in cash GDP, you could say the job was more or less done. All you need to do is stand back, and wait for that dollop of money to work its way through the system.

That way of looking at QE points in the direction of putting the policy on pause for a while after the £125bn is spent. Or, to let the markets down gently, you might say you were going to spend the final £25bn of the £150bn originally authorised by the chancellor, but at a slower rate.

But that's if you think of QE as a one-off injection. A lot of people think of the policy rather differently, as an ongoing stimulus, requiring continual injections of cash.

Economists who emphasize the policy's effect on government bond yields - and thus long-term borrowing rates - tend to think of it in this way. They think it would be disastrous to stop now.

As I've discussed in the past, QE is an "all things to all men" kind of policy - its supporters have a lot of different explanations for why it will work.

Some focus on the direct impact on the money supply, others on the level of bank reserves and the quantity of bank lending, and still others on the impact on public and private borrowing rates (I went through the various channels in some detail on 5 March).

Up until now, it hasn't really mattered which one you support. In fact, Bank officials have tended to talk of all these mechanisms operating at the same time. But now it is starting to matter.

That's because, if you think that the quantitative, money supply channel is what matters, the job might almost be done. But if your focus is on government bond yields and the level of bank lending, QE has barely begun. Government bond yields are now almost exactly where they were when the policy started.

As I've said many times before, a lot of other things have been happening since March - notably an explosion in estimates of government borrowing. But if you think bond yields are the key channel through which QE supports the economy, you're not going to want to turn the tap off anytime soon.

As ever, it's (even) more complicated than this. For starters, as we know, these are not normal times for the demand for money, so that one-for-one correlation between the amount injected into the economy and the level of nominal GDP may not hold. If people simply hang on to the cash, you might need to spend more to have the same effect.

However, by spending £125bn, the MPC has already assumed a much higher degree of cash hoarding than you would normally expect. The Bank is assuming that these usual multiplier effects - through the banks lending on the money, which in turn gets deposited and lent on to others - largely do not apply. Even in these strange times for the financial system, £125bn is an awful lot of cash to inject into the economy in five months.

It's striking that the governor, Mervyn King, has always tended to stress the quantitative side of QE - the impact on the broad money supply, and cash GDP. At repeated press conferences he has gone out of his way to downplay the likely effect of QE on bank lending, and (to a lesser extent) government bond yields.

You might think that would point him in the direction of giving QE a rest, either at the end of this month or (more likely) the month after that.

But we also know that he thinks the economy could be much weaker coming out of this recession than the optimists hope. And that the fears of inflation resulting from QE (such as those voiced by Liam Halligan on Today this morning) are greatly overdone.

So, it's a dilemma. For what it's worth, I think they could announce a further £25bn in asset purchases today, but they won't decide what happens after that until at least their August meeting, when they will also have new inflation report forecasts to consider.

We'll find out soon enough.

Update, 12:30: The statement stands for itself: the MPC has indeed deferred a major decision on the future of QE until the August meeting, when they will have the new economic forecasts in the Inflation report in front of them.

Many had expected them to authorise a further £25bn in purchases, to lessen market uncertainty in early August when the existing £125bn will have been spent. They could then have discussed at the August meeting whether to ask the chancellor to underwrite purchases of more than £150bn, or to put the policy on hold.

It is interesting that they did not feel able to pre-announce any additional purchases under QE at this time, despite the risk of creating market uncertainty between now and August.

Clearly, they do not consider the continuation of the policy to be a done deal. It may not be the most likely outcome, but on the basis of this decision there is a real possibility that QE will be put on hold after the end of this month.


  • Comment number 1.

    Stephanie, How can you say that the views of Liam Halligan are nover done? Where in history can you point to where printing of money doesn't lead to inflation?

  • Comment number 2.

    Surely, the problems with QE will be that the banks will just hoard the money because Alistair Darling has called upon them to increase their capital reserves. Therefore, the objective of increasing the money supply for business will not be achieved. Effectively the Bank of England will just be creating new money to buy bad assets from the banks.

    Furthermore, the argument that GDP is down 9% so we just top it up by making new money out of nothing is the logic of a delusional fool!? GDP is supposed to be wealth that has been created, e.g by manufacturing or value added services - you simply cannot make up GDP by creating money out of nothing.

    If the government must print money, and lets face it QE is just making money out of nothing, then they should create the money and put it directly in the treasury so it can be spent by the government. That way the money goes into circulation and we take on less National Debt.

    This whole financial crisis was largely the result of over-complicated financial trickery, and QE seems to be more of the same rather than an actual solution.

  • Comment number 3.

    It seems to me that the bond market is defying gravity. Bond yields will inevitably rise and the equity market will take an inevitable bath as the bond equity yield gap leads the fund manager herd back out of equities. This Autumn is not going to be pretty.

  • Comment number 4.

    I think they will release the £25 billion,its going to be a long haul back to significant GDP growth for the UK economy.

  • Comment number 5.

    Until QE sums injected become an order of magnitude higher, they will have no effect at all other than to accelerate deflation.

    Why? Because money injected and circulating is mostly going to fund deleveraging, and the level of private debt is much higher than the public debt. This is one characteristic of the depression.

    I can't see how it can get any simpler than that. That is what is happening. What is the debate about?

  • Comment number 6.

    #1 - Japan, lost decade.
    #2 - Great Depression, USA
    #3 - 2008,2009 - USA, UK, elsewhere

  • Comment number 7.

    You make this QE thing sound very complicated. Mervyn King told the Treasury committee that QE had two distinct aims : boost money supply to support the inflation target ( gilt purchases)- the MPC are tasked to do this ; improve conditions in non bank credit markets ( private asset purchases). Growth of M4 non financial supply was their key indicator of the first objective. The brief allows them to invest 150 billion - no more. Your post starts to touch on the impairment to QE's expected operational effects - its a shame you dont make those clearer and specific for the readers. Mervyn King has been saying that banks' balance sheet problems are a major impairment. They have, to date, been capitalised to survive, not to lend! You have now got a chicken and egg as to QE being successful or not. This is aside from your failing to inform us as to who the sellers of gilts are, and what they have been doing with their liquidity. Has that liquidity been reinvested in new government bonds / taken abroad, for instance??

  • Comment number 8.

    I heard this morning a throw away line on Today (R4) that the amount of quantitative easing so far has doubled to amount of money in circulation.

    If this is true does this not imply that the value of each pound in circulation has halved!!! (Are we talking MO? or something like MO.5?)

    This is an absolutely disastrous level of inflation no matter how you look at it.

    The Bank of England has already destroyed the Nation's wealth and MUST STOP NOW!

    They MUST cease this stupidity immediately and put up interest rates NOW.

    STOP PRINTING MONEY it does not work!!!!

  • Comment number 9.

    Is it anyones job to work out where and how the QE money has affected the economy?

    Standing back through this (possible) first phase of QE and waiting for the dollop of money to work it's way through the ecconomy. Will be useful only if we know how it has helped the economy - if 110bn has gone in and 40bn has leaked out of the back door on imports or the funding of more Off-Shored Jobs, then we are back at square-one - borrowing to pay for short term assetless wealth....

    But hey, we are getting closert to an election, the pain can come later...

  • Comment number 10.

    #1. Brattbakkk:

    Where in history can you point to where printing of money doesn't lead to inflation?

    Historically, prices have rarely been stable. Usually there has been either moderate inflation, which benefits borrowers and the economically active, or moderate deflation which benefits the wealthy and economically inactive. Most societies have found the former option to be less damaging. The key in both cases, is that either inflation or deflation must be moderate if the social effects are not to be catastrophic.

    The, to a novice, shocking truth is this: if money were not "created" in some way, usually arcane and covert, then an expanding economy* would be subject to rampant deflation, with all its attendant problems. Avoiding this risk is why HMG has never set the BOE a zero inflation target.

    One example of successful and overt money printing was in the colony of Maryland in the mid-eighteenth century. It declared a dividend of thirty shillings to each taxable citizen. Various other "middle" American colonies like Pennsylvania printed money at the time to pay public expenses. However this money was also legal tender to pay taxes. In the end, the economic stimulus provided was such that these notes were eventually redeemed in hard cash. There were of course other cases, like Rhode Island where there was no moderation and the paper became worthless.**

    The key to success was and is moderation in money/credit creation, something which our banks forgot in the run-up to this crisis. Broadly, the money in circulation should match the goods and services available.

    *On average, economies have broadly been expanding for several hundred years, if only because of the increasing human population.

    **Source: "Money, Whence It Came, Where It Went", an excellent book by JK Galbraith, happily now back in print.

  • Comment number 11.

    #8 John

    I've recently raised this on Peston's blog. See the following on how M4 (total - broad money) is ramping up:

    See the figures on post #135. Downloading the data from the ONS is very scary! Not just the present situation, but also the longer term trends, too.

    If Soddy was right, and that "Money is debt", then we are fast on the way to having a "cash-in-hand" (i.e. highly liquid) debt of 25% of GDP in 2008, and probably on course for 40-50% in 2009!

  • Comment number 12.

    I completely agree with #8.!

    I wish I could remember the text book so that readers can come to their own conclusions but if I remember correctly the long term "cost" of money viz the interest rate is around 2.5 to 3%. This figure, at a minimum, is where we need to be soon.

  • Comment number 13.

    GDP is a measure of output

    'Money'created by quantitative easing surely is an input which also surely has just filled in part of a gaping great local hole created by the contraction of 'money' from overseas.

  • Comment number 14.

    It didn't work for the Germans/Weimar Republic.
    It hasn't worked in Zimbabwe for Mugabe (gasps of breath for mentioning the Z word!)

    ...and guess won't work here either.

    Watch out for roaring inflation!

  • Comment number 15.


    M4 is not ramping up at all. Those figures no longer apply. I hope I can post a link directly to a picture:

    The figures for the USA (and no doubt mirror the UK) show that exponential debt growth (aka money growth) was going on since the 60s until end of 2008 or thereabouts ... and then reversed to what is now a calamitous drop of about 2trillion USD per year.

    That is what QE is miserably failing to address - not a growth in money supply at all, but a mindblowingly rapid implosion.

  • Comment number 16.


    Please respond to #7 shireblogger's request to know WHO the sellers of the gilts are?

    Where is the liquidity going? (as it sure doesn't seem to be going back into the UK economy).

    shire's been asking you for a while now but with no repsonse to date.

    When it all goes pear shaped...I want to know who has profited from this fiasco and who is at blame!

  • Comment number 17.

    OK so QE has been suspended for at least 1 month. My gut feeling is that this is a wise decision - if only because nobody kew if it was working or where the inputs had gone!

    Surely now is the time to declare a 'stress test' on QE. By clearly defining the peramiters of the test it should be possible to make a more informed decision as to QEs continuation (or otherwise) and the likely effects of hat upon the economy. Or is that just too much of a simple process?

  • Comment number 18.

    Wonderful academic argument....of course it was the academics, who for large speaking fees, addressed banking and investment conferences and meetings and praised the industry for such creative financial applications. Oh, that's right, it all fell for academic consultants must be good because no other recognition of the past mistakes is part of the present thinking.
    Maybe take the 25Bn and provide some sort of tax credit for those who lost funding in retirement accounts, even at some percentage of loss. The politicians and bankers seem to have lost sight of where the money actually comes from. If confidence in the economy is the goal, doing something to boost the confidence of the individual is needed. Because this is about pyschology (and fairness) and not finance the discussion will never be considered. It's not about the math, it is about the people, yes, those people.

  • Comment number 19.

    #16 BankSlickerminustheR

    Thanks, it cries out for an answer and I hope Stephanie will tell us.

  • Comment number 20.

    No one can tell if QE has worked or not because we have no previous experience of it to base any kind of comparison against. Mervyn King said last month that in his view we would not start to notice the effect of QE for about 6 months so it makes sense to wait and see what the economy is like in the autumn before we continue printing money like it was going out of fashion. For one thing, much of what happens to our economy is in relation to what will happen in other economies around the world, ie you could print money for ever but until the U.S.A starts to recover it won't make much differance. Once we get a few months of encouraging economic news and confidence returns then things may pick up quite fast. The worst possible thing that would kill off any recovery here faster than anything is a rise in inflation leading to higher interest rates, do those people who say inflation won't take off know that for sure? Do those who say it will rise know any better? The answer is we just don't know!
    QE must be doing something right though eh, because the Nationwide now feels confident enough to start providing sub-prime mortgages again......every cloud has a silver lining!!

  • Comment number 21.

    Looks like at least Mervyn King realises the game is up and is reluctent to toss any more cash down the Labour drain to keep Brown's forlorn hopes of an election victory alive. The sooner interest rates are raised and an attempt to reduce government spending is made the better for the economy. At the moment nothing is happening because we have a government which is so paralysed with the fear of losing power that it will not take any action which might lose votes even though such measures might help the country.

  • Comment number 22.


    It is unfortunate that you (or anyone else) sees things in terms of politics. It does not make one iota of difference who is in power, or who was in power. This has nothing to do with political parties.

    QE is not working, because the injected money is going to either
    a) Hoarding by banks
    b) Paying off debt by companies and individuals

    The levels of private debt are too high for QE to have any effect, unless the injections of money are in order of magnitudes higher.

    It is as simple as that. There is nothing more to understand.

  • Comment number 23.

    #16. BankSlickerminustheR wrote:

    "Sellers of the gilts?"

    Banks! The consequence being that their balance sheets look to have far better tier 1 capital ratios.

    But this is all that has happened.

    QE has not increased lending one jot! Which in one sense is a good thing as it has not yet stoked up inflation (YET - But just watch this space!) QE as a way of increasing the money supply is a failure, but it has saved the banks from cutting back even more and at the same time being able to "appear" to have better balance sheets (and I stress "appear")

    Yet again Mervyn King has proved himself a ditherer and a coward - he knows interest rates MUST rise substantially and soon. Indeed the longer he waits the bigger and sharper the rise will be. Dr King, either quit, and let someone with the guts to do what is right, or get on and do it yourself before quitting. Do not waste yet another month with indecision!

    Anybody have any better more detailed information?

  • Comment number 24.


    Totally agreed. Except I don't see that YET happening any time soon, and I don't see interest rates rising in nominal terms, only real terms.

    See #15 and the host page of that image for more detailed info and why I don't see that YET happening in the next few years.

  • Comment number 25.

    Today's decision looks like the return of a tiny bit of financial prudence in a country that appears to have lost any sense of the word's meaning. Those who demand QE are exactly the same people who created the bubble. They should be very quiet!

  • Comment number 26.

  • Comment number 27.

    Could it just be that the MPC is keeping £25bn "in the bank" against the high probability of trouble at mill in the autumn?

  • Comment number 28.

    I believe that nobody has a clue how quantative easing will affect the economy. The law of unintened consequences is likely to throw some things up that nobody has dreamed of. Economists can have a field day being wise after the event, but it doesn't help the MPC who are in the cauldron trying to cope with the big freeze.

    I consider that the quantitative easing should be suspended till this time next year so the we can be utterly sure how it will work its way through the economy. I still think it possible that inflation will take off big time as a result of QE and the B of E would look very silly having to rack up interest rates above 10% at a time when the economy is already in deep recession.

    By the end of this year, the huge drop in mortgage payments will have dropped out of the RPI numbers as will the fall in the price of petrol. Food inflation is a big number. Energy prices are still being kept sky high by the cartel of electricity and gas suppliers. So, whatever the B of E says, inflation IS a threat and printing more money than anybody knows what to do with has to feed through somewhere.

  • Comment number 29.

    The WHOLE MPC policy is NUKED QED or NOT UK PLC is BROKE/BUST period.

  • Comment number 30.


  • Comment number 31.

    Dear Mr CURZON!

    WE all thought you were going to apply for a banking licence a while back!

    Please update us as to how you got on?

    BankRSlicker ;o)

  • Comment number 32.

    Dear Bankslicer

    We did go into it the largest overhead would be to pay for the failure

    of all the FAILED banks etc.So it's not viable. . .

  • Comment number 33.

    Whilst interest rates do need to go up, I think it is fair that they stay suppressed for a few more months. I thought last year the 0.5 rates would need to exist at least 12-14 months. However, I do see interest rates rising throughout 2010 and 2011. They may have to maximise at 7-8pc, but probably lower as the global recovery is still slow. Secondly, oil will probably trade around 80-90 USD and so increase inflationary pressures, but more importantly hit wallets and reduce bubbles elsewhere. Far better for the UK to increase the taxes associated with home ownership, to suppress house-price growth.

  • Comment number 34.

    I've only had my own anecdotal observations to go by until recently but it seems to me the US is in a depression. I see lots of bankrupcies in mid sized retail chains, drastic reductions in retail prices, talk of thousands of car dealerships going out of business, lots of empty stores with no customers in them, and very slow activity in my own industry related to industrial construction.

    A recent look at M2 shows that there was a spike in the money supply some months back but then it leveled off and stayed where it was. This has led to contraction of the economy. Fears of monetizing US government debt that some lenders to the US had such as by the government of China are unfounded right now. Banks are getting money at zero percent and lending it out at 5 or 6 percent when they lend it at all. Clearly they are sitting on it. Unless and until there is enough money pumped into the US economy, the big wheel that drives all the other little wheels will be turning very slowly. I don't see any evidence of all those so called shovel ready projects putting money in people's hands. I'll bet the velocity of money (multiplier) is also abnormally low. If this continues much longer, in about a year you will be able to buy any new car you want for $6000 if you can pay for it in cash. Near San Diego's pier alone, there were 180 acres of new imported cars dealers wouldn't take delivery on because their lots are already filled with unsold cars. In my area, regular gasoline sells for around $2.20 a gallon, 93 octane (premium) at about $2.45. Porterhouse and rib steaks sell for $4.99 a pound in local supermarkets when they are on sale. Imported cheeses for about $15 to $22 a pound (my cheese index market indicator.) Vice President Biden said last week that the Administration had underestimated the severity of the difficulty the economy is in. Unanswered is whether or not the stimulus package looks insufficient in retrospect given this new assessment. More drastic and direct action to inject large amouts of cash, a shot of adrenalin might be needed and soon if the patient is not to go into cardiac arrest.

  • Comment number 35.

    Why, oh why, these recessions are not solved in simplest of ways: wide scale tax cuts financed by central bank?

    This theory that quantity of money determines price levels is just BS, in real world it is production costs + markup that determine price levels. Why are economists so stupid?

  • Comment number 36.

    whydoi #35

    "Why are economists so stupid?"

    That's a difficult question to answer. My hunch is because they are human. Being human, they have enormous hubris, big egos. They think they know everything. With their powerful mathematical models and their powerful computers they thought they had all of the answers. Economists of the 1980s and 1990s thought they were much smarter than their counterparts of the 1930s. Those economists didn't have the benefit of all this high technology and advanced computational methods. Instead, they actually had to think using their own brains. In fact they were far superior to today's economists. They got to the bottom of the reasons why the great depression happened and were successful at getting legislation passed that imposed restrictions that made another such depression just about impossible once the economy recovered. What should have happened is that the economists should have insisted on more controls to prevent an end run around the controls and regulations in place by those inventing complex new financial instruments to evade them. Instead, having dismissed those old economists as as primitives, the people who regulated the economy in recent decades removed every one of the controls that had been put in place in the United States and recreated exactly the same conditions that led up to the great depression in the 1920s. They didn't make another depression possible, they made it inevitable. The entire world suffers the consequences of their stupidity and hubris. And now we are relying on these very same people who told us just 18 months ago that there wouldn't even be a recession to the depression they engineered. The evidence so far is that their prescription isn't working. Their only excuse, it hasn't been given enough time yet. While we're waiting for it to take effect, business, individuals, even governments are going bankrupt. When recovery finally arrives at the rate things are going, the economists will be able to say in the world's eptaph that the operation was a success but the patient died.

  • Comment number 37.

    It is fascinating now that the entire world is essentially bankrupt, flat on its back, its financial system shattered, no corner of the world left untouched by the impact of what these wizards have wrought to hear economist after economist come on American television to say that they worry that overregulation would inhibit business activity, innovation, investment, and risk taking in the future. They don't get it. That is precisely what it is supposed to do, the greater the risk, the greater the inhibition. It doesn't look like it will be any time soon that we will have to worry though. Given current conditions, just a return to normal business as usual may be years away.


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