David Prosser: Will more QE refloat Britain's economy?

Outlook It looks ever more likely now that the Bank of England's Monetary Policy Committee will call for another bout of quantitative easing in order to get the economic recovery back on track (or to avoid deflation in the terms in which its mandate is framed). The minutes of the meeting suggest QE2 may begin as soon as next month.

Still, while doing something is better than doing nothing in the face of the risk of recession Britain once again faces, what will more QE achieve?

The Bank of England published fascinating research last weekend suggesting that its first round of QE boosted growth by up to two percentage points – if it is right, Britain would therefore have remained in recession for as much as a year longer than it actually did without this monetary policy jolt.

This time around, however, the effects may be less dramatic. The slowdown in the pace of economic recovery the UK has seen over recent months has partly been a domestic matter: above all, the squeeze on household incomes from austerity measures and rising inflation has hit demand. But the really big dangers in the months to come are more global: the damage threatened by the slowdown in the pace of recovery around the world and the havoc the eurozone sovereign debt crisis will wreak if it is not resolved satisfactorily.

With both these fears hanging in the air, the mitigation that QE represents is even more welcome. Still, this time the positive benefits of another round of monetary stimulus are likely to be outweighed by the negative effects of matters that are beyond the control of domestic policymakers. We are unlikely to see a repeat of the 2 per cent growth uplift.