David Prosser: There is still no evidence QE is working

Outlook: It may take a new perspective to get the Bank to think again
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The Independent Online

Gordon Brown will not have relished the news that Canada's third-quarter economic performance has taken it out of recession, leaving the UK as the only G20 nation stuck in the mire. But the political damage was done when France and Germany returned to economic growth – further unflattering international comparisons have rubbed in the salt, rather than inflicting fresh wounds.

In fact, the data that will really have worried the PM yesterday was released not in Ottawa but at Threadneedle Street, where the Bank of England's latest report on bank lending and money supply advances the case that its £200bn quantitative easing programme is working not a jot.

When Mervyn King, the Governor, was asked earlier this year how people should judge whether QE was working, he suggested looking at the M4 measure of money supply. Mr King wants to see it growing at an annualised rate of 6 to 9 per cent, as it was before the credit crunch. Well, yesterday, the Bank's latest figures, for the three months to the end of October, put the growth of M4 money at minus 5.3 per cent.

Nor is bank lending to business showing much improvement. On an annualised basis, it was down by more than 3 per cent over the same three-month period, compared with average rates of growth of 10 per cent prior to the recession. The largest companies are raising money through capital issuance on the stock market, but that's not an option for small and medium enterprises, which continue to find bank finance difficult to access.

Even the better news on mortgage finance relies on comparisons with a low base. As the graphic opposite reveals, while mortgage advances have now been increasing again for several months, we are only half-way back to pre-crisis levels of lending.

The counter argument is that without QE all of these indicators might have been sending out even greater distress signals. But even so, the lack of tangible success for the Bank's flagship policy so far undermines the idea that QE can help deliver a return to the kind of rates of growth forecast by the Government.

Alistair Darling's pre-Budget report next week is widely expected to include lower forecasts for 2009 GDP, but the Chancellor is thought to be sticking by his 2010 projections. What, though, is the prognosis if QE cannot deliver more than this?

It may take a new perspective to get the Bank to think again. Adam Posen, the Monetary Policy Committee's newest recruit, has said the Bank should be thinking about what to do next if growth does not return next year in convincing fashion. But with interest rates at a record low and £200bn of helicopter money almost gone, the Bank is running out of moves. And for Mr Darling – or a Tory successor – that spells trouble.

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