One of the newest members of the Bank of England's Monetary Policy Committee, David Miles, yesterday answered criticisms that the Bank's policy of quantitative easing has not proved as successful as was hoped.
The most common question being asked of bank officials is "Is QE working?" and it is a fair guess that few questions are asked as often within the Bank's walls. Has, in other words, the £150bn so far spent on buying "assets" – gilts plus smaller quantities of commercial paper and corporate bonds – had much impact on the real economy? And if not, how long will we have to wait?
Recent speculation about lenders "hoarding" cash held at the Bank as reserves have made the debate more bitter (and misunderstood, given that they are simply an accounting consequence of QE). Mr Miles said yesterday: "QE is having an impact and that is relevant to economic conditions right across the country, [not just in]... financial markets in London but in high streets and factories and homes throughout the UK."
He added: "I think the evidence suggests there are some significant effects of QE, and they are ones which help us travel on a path towards a more sustainable banking structure – one where reliance upon bank debt by the private sector will likely be lower and where the banks are better capitalised and better able to handle fluctuations in their sources of funding."
Scepticism about the efficacy of QE is primarily driven by the arguably disappointing effect it has had on bank lending and the growth of various measures of the money supply, both erratic statistics but ones which have not been transformed since the spring. Neither were "targeted" by the Bank when it embarked on QE, but it is fair to say that the Bank might have welcomed such growth as something of a bonus.
Not long after the policy was launched with an initial "budget" of £75bn in March, the Bank's chief economist, Spencer Dale, gave a speech entitled "Tough Times, Unconventional Measures". He argued: "Purchasing assets with central bank reserves will significantly increase the amount of liquidity in the system. This expansion in the supply of money may in itself encourage greater levels of lending and borrowing. Bank deposits are likely to increase, providing banks with a ready source of funding to finance additional lending."
Fortunately for the Bank, however, the other "transmission mechanism" of policy has proved much more effective. Just as well, perhaps: no one in modern times has ever tried to inject the equivalent of 12 per cent of GDP into the economy, and the Bank's programme is, given the size of the UK, the most ambitious in the world. As the Governor Mervyn King and his deputy Charles Bean often stress, the leads and lags are unpredictable; but we should be seeming some effects by now.
Without a "counterfactual" it is impossible to be sure – but it may not be a complete coincidence that London equities enjoyed their most successful quarter ever in the last three months, that capital issuance of equities and bonds is running at very healthy levels by recent standards, and all the indicators of how easy and cheap it is to raise funds on capital markets are also much improved – at least on where they would have been without the QE boost.
As the Bank's programme has pushed up gilt prices and driven yields down, it has encouraged investors to switch to bonds, shares and other assets, thus helping firms to raise capital by avoiding banks. Thus, one reason why the Bank lending figures look weak is because firms' fund-raising has migrated to the capital armlets. A global revival in risk appetite has also played a part, of course, but few argue that the Bank's policy has not done some good. Foreign owners of UK gilts may have sold them, helping to push the pound lower and stimulating exports.
But however much benefit QE has provided to large corporates, it has been of much less direct use to smaller companies and first-time buyers. For them, the cost and availability of credit are still tight. There is also the danger that, especially in the household sector, a long-overdue aversion to debt and preference for saving has arrived just when the economy least needs it.
In Keynesian terms it means that, for these groups, the Bank may have simply redefined the "liquidity trap": if we are frightened by debt then no amount of QE will persuade us to borrow and spend.Reuse content