F&C’s head of UK equities Peter Lees has referred to the latest round of quantitative easing as a “short-term fix”.
He says: “The effect of QE is like a shot of heroin to a drug addict. It produces a short term fix but it makes the longer term situation more difficult to resolve.”
Last week, the Bank of England announced quantitative easing of £75bn in contrast to the first allotment of £200bn in early 2009.
The announcement follows a further downgrade in the UK’s GDP figures reported on October 5. The figures for both the first and second quarter of 2011 were revised from 0.5 per cent to 0.4 per cent and from 0.2 per cent to 0.1 per cent respectively.
The new calculations also revealed the UK economy also suffered a much steeper recession in from 2007 to 2009 than was previously thought and represented the biggest decline since the slump of the 1930s.
He adds: “The long term risk of QE is that the sharp rise in the narrow money supply leads to high inflation. Once the dam breaks the significant rise in money will inexorably lead to higher inflation that will be very difficult to reverse. This may, indeed, be the end game of the current debt crisis if all else fails.”
Narrow money supply includes all physical money like coins and currency along with demand deposits and other liquid assets held by the central bank.