Jury still out on quantitative easing
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Economists are still at odds as to whether the Bank of England’s quantitative easing programme is working after underwhelming fiscal figures yesterday.
In its October lending report, the Bank revealed that M4 “broad” money - the entire money supply - had contacted by 0.7 per cent over the month and 5.3 per cent over the last three months.
Many are using broad money figures as a means of assessing how well easing is working - the Bank has injected £200bn into the economy as a means of increasing the amount of money in the system which in turn encourages spending, lending and borrowing.
“With interest rates at a record low and £200bn of helicopter money almost gone, the Bank is running out of moves.”
David Prosser
In his column for the Independent, Former Legal & General chief executive David Prosser said quantitative easing “is working not a jot”.
He says: “When governor Mervyn King was asked how people should judge whether easing was working, he suggested looking at the M4 measure of money supply. Mr King wants to see it growing at an annualised rate of 6 to 9 per cent, as it was before the credit crunch.”
Prosser questioned whether the latest Bank figures may lead Chancellor Alistair Darling to change his prediction for 2010 GDP figures.
He says: “It may take a new perspective to get the Bank to think again. But with interest rates at a record low and £200bn of helicopter money almost gone, the Bank is running out of moves.”
Barclays Capital analyst Simon Hayes says a broader measure of non-financials continued to show that funds raised through capital markets are being more than offset by the paying down of borrowing from banks. He says: “This is the route whereby quantitative easing appears to be assisting banks to shrink their balance sheets rather than prompting a strengthening in lending to companies that do not have wholesale capital market access.”
But Henderson New Star economist Simon Ward argues that the money figures are skewed by the seasonal deposit holding patterns of pension funds and life companies, which are not counted as “intermediate” financial companies.
He says: “The combined money holdings of households and non-financial corporations, “non-intermediate” firms, rose by 0.3 per cent and 0.2 per cent respectively in September and October, with annual growth reaching an eight-month high of 2.9 per cent. This suggests that liquidity created by official gilt-buying is filtering down to “end-users” responsible for spending decisions.”
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