The Bank of England's Quantitative Easing programme successfully boosted the size of the UK economy and cut borrowing costs, according to new research released today by the central bank.
The analysis by the Bank's Macro Financial Analysis Division found that the asset-purchase scheme might have increased GDP by between 1.5 to 2 per cent and had an impact equivalent to a 1.5 to 3 percentage point reduction in interest rates.
The report, by Bank researchers Michael Joyce, Matthew Tong and Robert Woods, also suggests that QE increased inflation by between 0.75 and 1.5 percentage points.
Between March 2009 and January 2010, the Bank purchased £200bn of assets, most of which where medium and long-dated government bonds. This was a sum equivalent to 14 per cent of UK GDP. The purpose of this intervention was to inject money into the British economy, which was then in the grip of a severe recession.
The authors were keen to stress that these estimates of the impact of QE on GDP were highly uncertain and that it is hard to disentangle the effects of QE from other factors that might have boosted economic confidence at the same time.
They also argued that the same effect might not necessarily be replicated if the programme of QE was to be extended. But the report is, nevertheless, confident that the effects of QE have been "economically significant".
The findings are likely to be used as ammunition by those arguing that the Bank of England should extend its QE scheme in order to boost the flagging UK recovery, which grew by just 0.2 per cent in the second quarter of 2011.
Last week, Adam Posen, of the Bank's Monetary Policy Committee (MPC), urged his colleagues to approve new asset purchases worth up to £100bn.
"If we do not undertake the stimulative policy that the outlook calls for, then our economies and our people will suffer avoidable and potentially lasting damage," he told an audience in Gloucestershire.
That was followed by the Business Secretary, Vince Cable, who argued in a new pamphlet for the Centre Forum think-tank that the Bank should be prepared to extend QE to sustain demand in the economy.
The MPC kept interest rates on hold this month and did not vote to increase QE. The minutes of those meetings, which will be released on Wednesday, will indicate whether Mr Posen was successful in persuading any colleagues to join him in supporting an extension of asset purchases.
Howard Archer, chief UK and European economist for IHS Global Insight, said: "The ongoing stream of weak UK economic data, worrying global economic outlook and heightened financial market turmoil is exerting ever more pressure on the Bank of England to take stimulative action, and sooner rather than later."
He believes the minutes will show at least one MPC committee member voted with Mr Posen on QE. "An interest rate hike is clearly off the agenda for a long time to come given the current weakness of the economy and the worrying domestic and global growth outlook," he said, predicting that rates were unlikely to rise before 2013.
As well as backing more QE, Mr Posen has called for the creation of a new private bank in order to increase the flow of credit to the economy. This new bank would be mandated to lend to small businesses and new start-ups and would be supported by the Government and the Bank of England.Reuse content