Does the Bank of England's decision yesterday to end its £200bn quantitative easing programme (printing money in plain language) signal the end of the recession and the return to more normal monetary conditions? Or is it merely a pause?
The answer is that no one seems quite certain, certainly not the Bank of England which announced its decision yesterday with a host of caveats warning of the fragility of the recovery and the possible need to fire up the weapon again should circumstances warrant it.
In one sense, quantitative easing has been a successs. By pumping out electronic money and using it to buy government debt, the Bank of England has held down gilt yields, making the returns of corporate bonds and the stock exchange look more attractive. Commercial banks have also benefited from the greater liquidity created by the Bank's policy of buying up gilts.
It is worth remembering that the fear before QE was introduced in March of last year was that Britain's recession – worse than most European countries – might descend into a full-blown depression as prices fell and consumption collapsed. Quantitative easing can be said to have played a substantial part in staving off the worst.
And yet, judging from the slumping money supply figures and the feebleness of the recovery, printing money has not had the transformational effect that many hoped for. There are indications that, rather than increasing lending to businesses in the real economy, the policy has mainly served to pump up share prices. QE is the strongest weapon in the monetary armoury, but it has not proved sufficient. And policymakers, with one eye on the recent spike in UK inflation (mainly thanks to the fall in the value of sterling) are wary of doing more now.
The fact that QE has paused is welcome news in one sense. It implies that the worst is over. But the Bank of England's suggestion that it may be reintroduced is an indication of just how how short of options the Old Lady of Threadneedle Street is if the economy were to slump back again. The bottom line? We're not out of the woods yet.