David Prosser: A bow for QE that may not be deserved


Outlook: So it looks as if the Bank of England's great money printing experiment is over.

A nine to zero vote against extending quantitative easing at December's meeting of the Bank's Monetary Policy Committee (following a split verdict in November) suggests its members think enough kitchen sink has now been thrown at the economic crisis. Assuming – as everyone does – that next month's figures reveal the UK finally made it out of recession in the fourth quarter, that will be it for QE for the foreseeable future, especially given worries about a spike in inflation during the first half of 2010.

Job done then? Well not quite. There is the worry that January's figures might produce another shock (the forecasts for the third quarter were also unanimous in calling the recovery). And even if we do get a couple of quarters of positive growth, the danger remains of sliding back into recession later on next year.

The jury remains very much out on the benefits of QE. Leaving aside the fear that a UK recovery may only be temporary, can we even be sure that the policy is the reason we have come this far? Read the minutes of the December meeting closely and you get the distinct impression that even the MPC itself isn't convinced.

They note that money supply growth – which the Bank always insisted would be the best way to measure whether QE was working – has not materialised. Indeed, money supply is currently falling at an annualised rate of 5.3 per cent.

Previously, the MPC has consoled itself with indicators such as the spread between gilt yields and rates on interest swaps – a measure of investors' views about risk – which had been moving the right way, downwards. This month, however, that trend seems to have reversed.

In other words, the MPC seems to be conceding, it is possible that the arrival of economic recovery is not a result of its QE programme. Does that matter, or to put the question another way, how much worse might the recession have been without QE? Well, it is impossible to know for sure, but this is not a moot point since the risk of the programme is not simply that it might not have worked.

Economists such as Morgan Stanley's Stephen Roach warn the sort of monetary policies now being pursued by central banks all over the world are "breeding grounds" for new asset price bubbles. Stimulating the economy back into life is good, but over-stimulation is not.

The trick is to spot when those bubbles are inflating. As economic sentiment improves, you would expect asset prices to rise, but have, say, stock markets bounced back too quickly? This will be the issue with which the MPC has to wrestle in 2010 and it won't be any easier than working out whether QE delivered a recovery in the year now ending.

PROMOTED VIDEO
News
ebookA unique anthology of reporting and analysis of a crucial period of history
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Training/Learning and Development Coordinator -London

£28000 - £32000 per annum: Ashdown Group: Training/Learning and Development Co...

Training Programme Manager (Learning and Development)-London

£28000 - £32000 per annum + benefits: Ashdown Group: Training Programme Manage...

.NET Software Developer (.NET, C#, ASP.NET, front-end)

£30000 - £45000 per annum: Harrington Starr: A Global Financial Service Organi...

C# Web developer (C#,MVC,ASP.NET,SQL)

£30000 - £40000 per annum + Bonus+Benefits+Package: Harrington Starr: C# Web d...

Day In a Page

A new Russian revolution: Cracks start to appear in Putin’s Kremlin power bloc

A new Russian revolution

Cracks start to appear in Putin’s Kremlin power bloc
Eugene de Kock: Apartheid’s sadistic killer that his country cannot forgive

Apartheid’s sadistic killer that his country cannot forgive

The debate rages in South Africa over whether Eugene de Kock should ever be released from jail
Standing my ground: If sitting is bad for your health, what happens when you stay on your feet for a whole month?

Standing my ground

If sitting is bad for your health, what happens when you stay on your feet for a whole month?
Commonwealth Games 2014: Dai Greene prays for chance to rebuild after injury agony

Greene prays for chance to rebuild after injury agony

Welsh hurdler was World, European and Commonwealth champion, but then the injuries crept in
Israel-Gaza conflict: Secret report helps Israelis to hide facts

Patrick Cockburn: Secret report helps Israel to hide facts

The slickness of Israel's spokesmen is rooted in directions set down by pollster Frank Luntz
The man who dared to go on holiday

The man who dared to go on holiday

New York's mayor has taken a vacation - in a nation that has still to enforce paid leave, it caused quite a stir, reports Rupert Cornwell
Best comedians: How the professionals go about their funny business, from Sarah Millican to Marcus Brigstocke

Best comedians: How the professionals go about their funny business

For all those wanting to know how stand-ups keep standing, here are some of the best moments
The Guest List 2014: Forget the Man Booker longlist, Literary Editor Katy Guest offers her alternative picks

The Guest List 2014

Forget the Man Booker longlist, Literary Editor Katy Guest offers her alternative picks
Jokes on Hollywood: 'With comedy film audiences shrinking, it’s time to move on'

Jokes on Hollywood

With comedy film audiences shrinking, it’s time to move on
It's the best of British art... but not all is on display

It's the best of British art... but not all is on display

Voted for by the British public, the artworks on Art Everywhere posters may be the only place where they can be seen
Critic claims 'I was the inspiration for Blanche DuBois'

Critic claims 'I was the inspiration for Blanche DuBois'

Blanche Marvin reveals how Tennessee Williams used her name and an off-the-cuff remark to create an iconic character
Sometimes it's hard to be a literary novelist

Sometimes it's hard to be a literary novelist

Websites offering your ebooks for nothing is only the latest disrespect the modern writer is subjected to, says DJ Taylor
Edinburgh Fringe 2014: The comedy highlights, from Bridget Christie to Jack Dee

Edinburgh Fringe 2014

The comedy highlights, from Bridget Christie to Jack Dee
Dame Jenny Abramsky: 'We have to rethink. If not, museums and parks will close'

Dame Jenny Abramsky: 'We have to rethink. If not, museums and parks will close'

The woman stepping down as chair of the Heritage Lottery Fund is worried