Leading article: Quantitative easing may help, but it is not the solution

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The Independent Online

Were there any remaining doubts about the severity of the economic situation, then the Governor of the Bank of England's observation that Britain is in "the most serious financial crisis at least since the 1930s, if not ever" has comprehensively dispelled them.

Mervyn King's remarks capped a week in which the construction sector slumped back into stagnation, Tesco reported the worst UK sales for 20 years, and the most recent quarter's economic growth figures were revised downwards to an anaemic 0.1 per cent. Meanwhile, in the rest of Europe, Greece warned that it will miss its deficit reduction targets, Italy's credit rating was downgraded, and policymakers bickered over plans to recapitalise banks threatened by their exposure to Greek debt.

Against such a background, the Bank of England's decision to pump another £75bn of new money into the flagging economy has much to recommend it. But it would be a mistake either to overplay the likely impact of another round of quantitative easing (QE), or to consider it as anything approaching a resolution of the economy's problems.

Even as the Bank is pulling its most forceful monetary levers, it is unclear how effective a second round of stimulus measures might be. At best, perhaps three-quarters of a per cent could be added to output – which is not negligible, but is hardly dramatic. And even if the scheme successfully lowers borrowing costs, questions remain as to how far the benefits will feed through to the most credit-constrained parts of the economy, such as the small-business sector.

Neither does QE come without risks. Proponents of the strategy downplay its potentially inflationary effect, pointing to the deteriorating global economy and expectations that current high inflation levels will dip early next year. But "printing money" is still something of a gamble, not least with short-term factors, such as factory-gate inflation levels, pointing the wrong way. QE also has knock-on effects elsewhere in the economy. Lower long-term bond yields will depress pension returns, adding to already significant pressures on company schemes.

One vocal supporter of the Bank's move is the Chancellor of the Exchequer. The details of George Osborne's "credit easing" initiative to target small and medium-sized businesses, which was trailed in his conference speech this week, will not be clarified until the end of November. With criticism growing of the Treasury's tardy response to several months of worsening economic indicators, Mr Osborne might expect a second tranche of QE to buy him some time.

Ultimately, both QE and credit easing are attempts to address a shortage of money in the economy. Were Britain's problems under its own control, such efforts might be more of a cause for optimism. Instead, it is a risk-averse global bond market that is forcing savage public spending cuts, and a crisis in the eurozone that is undermining bank lending and devastating demand. As the Chancellor acknowledged in his conference speech: "The resolution of the eurozone debt crisis is the single biggest boost to confidence that could happen to the British economy this autumn." Another round of QE is welcome. But it is no solution.

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