economy than expected. The other suggestion was that QE had been too small and the risk of a double dip recession was enough for the MPC in late 2011 to launch the second round of QE to give the economy a further boost. One of those leading the case for QE not working is, the inventor of QE, Professor Werner from Germany who has said, ‘UK QE has failed’. He claimed in a recent interview that the main idea is that as QE takes hold banks start lending more to economic agents boosting investment and that will in turn have its knock on affects throughout the economy. However, Professor Werner claimed, ‘bank credit is still shrinking’ 5 in which case there is a lack of confidence that is QE is designed to build. In a counter to this the Bank of England claimed that the QE they are carrying out is designed not to use the banks to increase lending but to increase it through them buying assets providing an alternative money supply until such time as QE has stimulated enough growth that confidence is growing and banks have repaired their balance sheets and can once again become the main supply of money within the economy 6 . However, Prof Werner’s argument does have one strong point that the benefits of QE aren’t filtering through the economy sufficiently and this is highlighted by the difference in credit availability to firms. The Bank of England credit reports for the last three quarters has shown that despite continuous increases in demand for credit from both small and medium sized firms credit available to them has remained broadly unchanged whereas larger firms have seen increases over all three quarters. The only positive is that the Bank reported ‘an increased appetite for risk’ during Q1 of 2014, which suggests that confidence is improving, which could be attributed partly to QE. Although this is encouraging the growing cash balances of large firms suggest a lack of investment opportunities suggesting that consumers are still wary and that although an appetite is growing confidence is still far from pre-recession levels. Furthermore, despite the encouraging employment statistics the low productivity growth and low wage inflation suggest that the economy has still not fully recovered. Overall, it’s hard to tell if QE has worked but we can look at the indicators. Personally I think QE is working but it still has some work to do especially on the confidence front as without it small firms will not see the benefits and as they control 70% of employment it may prove vital to ensure they benefit from the policy. However, it’s better to look at what QE has helped avoid in judging its success and this includes deflation and also helped stabilize the financial sector, which has saved the UK from suffering a much worse recession even if it wasn’t quick enough to help avoid a double dip recession. And if we look at growth as well the UK is predicted around 3% this year whilst the Eurozone is looking at around 1% and with the European Central Bank look to carry out QE itself under the International Monetary Fund’s encouragement maybe that is a sign of how important QE was for the UK economy. For now though it is time to turn our attention away from the question of the effectiveness of QE and towards the question of when and how to end it. As we have recently heard the Bank of England has kept QE on hold in the after the MPC met on August 7 th7 , and they will have been looking at reports on the economy and economic indicators to help it decide whether or when the time is right to begin to sell off some of the £375bn worth of assets. The main figure that has been at the centre of attention is productivity. UK productivity growth is ‘still abysmal’ according to the National Institute of for Economic and Social Research (NIESR) and this is backed up by the Bank of England in its latest inflation report, where figures show how much higher UK GDP would have been had it not been for the financial crisis 8 . This helps suggest that now is definitely not the time to begin to sell back government bonds to the market as the likely outcome is to see unemployment rise due to QE no longer keeping interest rates low. The low productivity also suggests the existence of spare capacity within the economy and whilst the Monetary Policy Committee predicts it to be around 1-1.5% of GDP 9 and NIESR predicts that it could be even bigger than that if this is the case, then ending QE could potentially start later than
5 http://www.bbc.co.uk/news/business-24614016 6 Why QE is the only game in town 7 Bank of England keeps rates and QE programme on hold.
8 http://www.bankofengland.co.uk/publications/Documents/quarterlybulletin/2014/qb14q201.pdf 9 http://www.bankofengland.co.uk/publications/Documents/inflationreport/2014/ir14may3.pdf
109
Made with FlippingBook - Online Brochure Maker