One by one, the world's leading economies are revising their view that sufficient stimulus has been extended to get them past the worst. Japan's Prime Minister says that with little sign of sustained recovery, he is thinking of another round, while the gentle extension of quantitative easing (QE) unveiled by the US Federal Reserve last night reflects the growing anxiety about the ability of the world's largest economy to put the downturn behind it.
So should the Bank of England follow suit? After all, it is nine months since it raised its QE funding and, that exceptional second-quarter GDP figure notwithstanding, there is now real concern that this country's recovery may already be running out of steam.
It is a tough call, as the minutes of the Bank's most recent Monetary Policy Committee (MPC) meetings hint. There are now members of the MPC who believe an extension of QE is worth considering. Equally, there are others who believe the time has come to begin tightening monetary policy.
The dilemma is acute. When the Bank embarked upon the unprecedented programme of QE – £200bn so far, remember – the fear was that the recession would turn into a deflationary spiral. We may now fear a return to the days of downturn – the dreaded double dip – but we are also having to contend with inflation that has proved surprisingly resistant. Returning to QE during a time of inflationary pressure would really cause a stir.
Still, the Chancellor has made it clear that the days of fiscal policy stimulus are over. He is pulling that particular rug from under the economy as fast as he possibly dares. In that sense, the MPC is now the only game in town for those who fear that the recovery cannot be sustained.
We should not forget that the status quo – with interest rates at a 350-year low and QE money still out there – is in itself expansionist. But the MPC will soon have to make it clearer which way it plans to jump next.Reuse content