Quantitative Easing is back, and £75bn better

The Bank of England has finally taken the plunge and decided to introduce another round of quantitative easing. Will it be enough?

by Emma Haslett
Last Updated: 06 Nov 2012
The Bank of England’s Monetary Policy Committee has held interest rates at decidedly boring 0.5% - but that’s not the real news: it’s also decided to pump another £75bn into the economy in the form of quantitative easing, after the Office of National Statistics revealed yesterday that the economy had grown by just 0.1% between April and July. It’s decisive stuff, particularly considering many economists had expected the MPC to delay any decision on the matter until November. But will it be enough to ward off the effects of the eurozone debt crisis?

So far, the Government has pumped £200bn in the economy – but that was back in 2009, when things were looking particularly dire. As well as being earlier than expected, this round of asset purchases, as the Bank likes to call it, is bigger than the anticipated £50bn. So the Government is clearly serious about giving the flagging economy a motivational kick up the backside, rather than just cutting spending. Markets were clearly impressed by the move: the FTSE 100 was up 2.3% shortly after the announcement – although the pound dropped by 0.9% against the euro and 1.1% against the dollar, which is to be expected.  

There’s been plenty of feverish discussion among pundits about the nitty-gritty of the process: while the Bank says it’s planning to use the money to buy gilts again, thus injecting cash into the economy, others aren’t so sure a repeat of last time is a good idea. As Wall Street Journal commentator Simon Nixon tweeted, that approach is considered by many ‘to achieve even less than last time. To repair the banking system it should buy bank bonds.’

That was echoed by Fathom Consulting (and former Bank of England) economist Erik Britton told MT after last month’s interest rate decision: ‘The Bank should channel [the money] into something more creative, like issuing bonds out of a bad bank, which could then be used to purchase bad housing assets off the UK market at fair value. To buy gilts is… Einstein’s definition of insanity: when you carry on doing the same thing again and again, but expect different results’. Harsh.

But will it be enough? With the eurozone debt crisis threatening to engulf the UK, many expect the Bank to have to increase the amount it’s injecting into the economy over the next few months. As CBI chief economic adviser Ian McCafferty put it, ‘only once the turmoil in the eurozone is resolved will confidence be fully restored.’ Looks like we’ll just have to sit tight…

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