Don't Bank on quantitative easing, says Merkel

Amid more Cabinet meltdown, the German Chancellor pours scorn on our attempts to boost the money supply.

Last Updated: 31 Aug 2010

Quantitative easing, the Bank of England’s radical move to pump more money into the economy, is a terrible idea, according to German chancellor Angela Merkel. The world's most powerful woman (sq. Forbes) has been laying into the US Federal Reserve, the European Central Bank and the Bank of England, suggesting that their approach will be hard to reverse and lead to rampant inflation. Criticism like this is exactly what our teetering Government doesn’t need, with ministers dropping like flies. But since QE has thus far proved neither popular nor effective, maybe the Germans have a point?

It’s a remarkable attack from Merkel, given that politicians normally shy away from criticising central banks (for fear of compromising their independence). But it’s clear that the Germans’ take on dealing with this crisis is very different to the US/ UK/ EU model, which involves pumping huge amounts of extra liquidity into the market, and worrying about the consequences later. By contrast, Merkel and co. worry that the central banks won’t be able to re-absorb this extra cash, potentially sending inflation through the roof. ‘I am very sceptical about the extent of the Fed’s actions and the way the Bank of England has carved its own little line in Europe,’ she scoffed, to a conference in Berlin.

Although Merkel’s ire was reserved for the Bank of England, which is technically independent from the Government, there’s no doubt that this will make uncomfortable reading in Whitehall. Admittedly Gordon probably has other things on his mind at the moment (it emerged today that Hazel Blears will join Jacqui Smith in the exodus of ministers – at this rate the PM will be able to hold his Cabinet meetings around a coffee table). But with a new Ipsos/ Reuters poll revealing that two-thirds of us think the ‘massive government spending... lacks focus and direction’, it’s clear the Government will be considered guilty by association.

The latest figures from the BoE won’t help. On its broadest measure, the money supply edged up by a measly 0.2% in April, less than the previous month, while lending to companies and households actually fell for the first time since records began. Which would rather suggest that QE isn’t really working. And the other alarming point is that the Bank bought twice as many assets from foreign investors as it did from UK ones – so two-thirds of its cash actually disappeared overseas (much to the disgust of the Daily Mail this morning).

To be fair, the Bank has always said it would take 6-9 months to assess the impact of QE. And on some interpretations of yesterday’s figures, a few economists reckon that there has been a marginal improvement. Let’s hope so – but the trouble is that if Merkel’s right, we probably won’t know until it’s too late.

In today's bulletin:

Don't Bank on quantitative easing, says Merkel
Network Rail keeps profits on track but misses efficiency target
New Look fashions 10% profit hike
The £0.5bn expenses bill
MT Special: Deborah Meaden talks common sense

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