expected. The slack allows for a period of non-inflationary growth for the UK economy, which could be capitalized on with low interest rates to encourage investment within the economy, which in turn could lead to increases in productivity, falling unemployment and rising real wages. These three indicators that I have just mentioned are at the centre of the decision and it has been made clear by the MPC that without increases in productivity and hints of real wages beginning to rise steadily there will be no changes to QE or the rest of monetary policy. With unemployment now around 6.5% 10 and continuing to fall with vacancies rising sharply over the last year a rise in real wages may not be too far away as the demand for labour rises we could see wages start to be pushed up as the unemployed figure falls below 6%. If this is the case then selling off government bonds could start as around August next year as long as we see productivity growth begin to rise although the best indicator will be short term interest rates being raised first by the MPC. However, if productivity doesn’t rise then ending QE could cause a rise in unemployment and so doing this would only be used if inflation needed to be controlled yet this is unlikely due to the estimated size of the output gap. So although this appears to make it simple there is a major problem that the MPC must consider and that is the issue of household debt. Debt is once again on the rise, fueled by low interest rates, and the savings ratio is falling. This could pose to be a problem and the Bank of England labelled it ‘a serious threat to the UK recovery’ 11 . This is because if interest rates start to rise as QE is ended it will hurt those who have high levels of debt or have mortgages and considering that consumers have been the backbone of the recovery it could be damaging for the UK economy if consumers had to cut their spending to address high levels of personal debt. The low savings ratio could make this even worse as debtors have even less reserves to fall back on if interest rates hit them hard. This could all be a problem if interest rates stay low for too long allowing debt to rise to a high level where there is the potential for the scenario I’ve just outlined to take place. So this makes it a balancing act for the MPC, they have to get the timing right or it could have a negative long-term impact on the economy. Whilst the timing is important there is also the process that the MPC will choose to sell back its bonds and it will be impossible to do this without a reaction from the stock market, ever the mere talk of tapering QE caused markets to react violently and sell off equities. Although it is almost a certainty to see a fall in equity values as the Bank of England begin to sell bonds back to the market the fall can be controlled by releasing bonds at a slow rate to avoid a large volatile reaction. To easy the reaction further the MPC are likely to raise interest rates first beforehand which will make monetary policy more ‘flexible’ if quick changes have to be made. Mark Carney announced last year that there would be several rounds of raised interest rates before he considered selling off the £375bn of assets 12 . This will allow the MPC to gauge the likely market reaction and reduce any negative impact that selling back government bonds to the market may have. What does the future of QE look like? It’s hard to know; predicting the movements and reaction of 60 million people over the next few years is difficult. Whilst we can expect to see interest rates rise next year once the MPC see productivity, wages and employment improve we can expect to see government bonds being released in the years afterwards However, with the tiny reaction recently in the USA to the Federal Reserve ending QE this coming October it is reasonable to assume that investors will be expecting the end and so markets will not be too volatile in response but there is never any certainty of this. Overall, I think that QE has helped the UK economy in its recovery; however, we will never know the resulting effect had we not taken the experiment of using quantitative easing. That is they key point, no matter how much research or investigating we do we will never know the exact extent to which it has boosted the economy, whilst I think it has helped others will disagree. Unfortunately, this uncertainty and divided opinion will continue beyond the end of QE; whilst the how is clear, the when, 10 http://www.ons.gov.uk/ons/dcp171778_361188.pdf 11 http://www.theguardian.com/business/2014/jul/03/housing-market-house-prices-economy-bank-of- england 12 http://www.telegraph.co.uk/finance/mark-carney/10524205/Bank-of-England-likely-to-hold-on-to-asset- purchases-for-several-years-says-Mark-Carney.html
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