In 2009, the Bank of England embarked on a brave new strategy of Quantitave Easing, never before tried and tested in the UK. The idea was that the BoE buying £200bn of corporate bonds from financial institutions would increase the amount of money in the British economy and stimulate the markets out of recession and back into growth.
The adventure was hailed as a success but what is not so widely known is that Quantitative Easing did not work as it was supposed to.
There exists no evidence that the 2009 bout of Quantitative Easing increased the circulation of money as many lending institutions simply stocked up on their capital or let the money move outside of the UK. However, crucially, there exists no counter-factual that the Bank of England’s decision was harmful.
Sure, the UK is the only deveoped country with high inflation which QE may or may not have caused (it certainly took Mervyn King by surprise) but the difficulty that exists in controlling this index means that one should tread carefully for fear of hyperinflation and drawing Zimbabwe comparisons. Anyway, this higher than expected inflation is a good thing as energy sales and retail sales (despite VAT) staying robust are evidence of a healthy economy and a strong recovery.
Possibly as a direct result of this rather woolly ‘QE doesn’t seem to be causing problems so let’s crack on with it’ mentality, there is a growing expectation that a second round of Quantitative Easing is on its way, possibly as early as November, (the Bank of England has to produce inflation reports and Mervyn King holds a Press Conference every quarter so it is likely that big QE decisions would coincide with these).
So expect the price of Sterling to remain low as we attempt to embark on an export-led, tourism-driven, soaked-in-money recovery to take place.
Here is the thing though – Quantitative Easing is pointless if everyone does it.
More Sterling gives the UK no competitive advantage if there are also more dollars in the US, no Euros coming out of Europe and overflowing Renminbi in China. Given that the US Fed is expected to bring in Quantitative Easing, Europe has no joint strategy with Germany holding its hordes of cash and China not far off triggering a currency war with its stocks of US dollars, now might not be the right time for the UK to go printing more money.
Is the following scenario really that unlikely? – QE pushing inflation up further, inflation rising again due to rising oil/food prices, wages increase to cover increased costs, strikes and wage demands in protest at George Osborne’s slashing of the public sector, companies raise prices to maintain profits and bonuses. In short, wages chasing prices and prices chasing wages. The classic wage-price spiral.
Then again, perhaps there is a clever game being played here. The mere suggestion of QE2 in the UK has helped dip the Sterling currency lower, so too the Dollar. Might the Bank of England and the Fed be boosting exports without having to actually see QE2 through to inflation-causing execution? It’s a strategy that makes sense if you don’t actually know what Quantitative Easing actually did the first time around and you feel like jumping ship before even getting onboard.
So, here’s the economic weather forecast. Becalmed interest rates, biting frost from Chancellor’s cuts, choppy winds from all overseas directions and a QE2 trying to hold its course without any meaningful direction from its captain.
We don’t really know if we’re being handed lifejackets or being shepherded onto the Titanic but, either way, it’s going to be all hands on deck from Wednesday.
#1 by NoOffenceAlan on October 20, 2010 - 12:04 am
Seems a shame for a thread to pass without comment, so I would just like to say this:
When learning to ride a bike, at some point you have to take the stabilisers off, even it means getting a few bruises.
So I would be disappointed if there was another round of QE.
#2 by Jeff on October 20, 2010 - 10:10 am
Thanks Alan, I think I agree (though I’m sure Mervyn King has a better idea than anyone here)
A few bruises might not go amiss but, moreover, the banks have enough cash to pay back without pouring more in there, particularly if they are not passing the cash on.