As the Bank of England's Monetary policy Committee prepares to announce its decision on extending its £125bn programme of "quantitative easing" at noon tomorrow, the Bank's own latest figures reveal how slow "QE" has been in feeding through.
Monetary growth in the second quarter of this year was just 3.1 per cent compared with the same period last year, the weakest expansion in a decade. However, the more up-to-date figures suggest a gently rising trend, with growth, on an annualised basis, reaching 3.7 per cent at the end of June, up from 3.3 per cent at the end of March. The Bank's figures on lending to the mainstream financial sector and the real economy – that is by stripping out the various special purpose vehicles set up by banks – also show a mildly hopeful picture. Lending rose by 2.7 per cent on the same basis in the second quarter, that is up on the 1.9 per cent recorded previously, and a contraction of 2.9 per cent in the last months of 2008. So called "M4 excluding intermediate Other Financial Companies" is closely watched by Bank officials, especially the less volatile quarterly numbers.
But the Bank also said some sectors had seen a reduction in lending, a subject made more politically sensitive by the £6bn in profits announced by HSBC and Barclays on Monday. Lending to non-financial companies fell by £14.7bn in the second quarter, with the retail sector (-£6.3bn), manufacturing (-£4.5bn); legal and other services (-£2.7bn) and construction (-£2.1bn) falling.
David Kern, the chief economist at the British Chambers of Commerce said: "We continue to urge the MPC to increase the pace of QE, well beyond £125bn, so as to improve access to finance for viable companies, and particularly small firms."
During the period covered by the latest data, £100bn had been injected into the economy via purchases of gilts and private sector securities. The aim of policy is to boost money supply, stimulate demand and return inflation to the Bank's official target of 2 per cent (it will fall below that figure in the coming months). Buying gilts and reducing their attractiveness by suppressing their yield will have helped push institutional investors towards equities and corporate bonds, especially as "risk appetite" has started to return. Many larger firms have been able to reduce their dependence on banks by turning to capital markets, arguably leaving more scope for smaller businesses to obtain funding. Dealogic said yesterday that some £88bn had been raised in London through equity and convertible bonds already this year, compared with £118bn in the whole of last year.
Even so, some analysts expressed scepticism. Howard Archer of Global Insight commented: "There continues to be little hard evidence of this so far, which is potentially worrying for recovery prospects. Consequently, the Bank of England may yet feel compelled to extend its QE programme."
There is £25bn left from the Chancellor's initial allocation of £150bn for QE in March, though the debate centres on a more substantial expansion.Reuse content