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An unknown quantity

Christopher Jarvis finds the industry unsure over whether the £200bn QE cash injection is working

The £25bn extension of the Bank of England’s quantitative easing programme has divided opinion.

Commerzbank corporates and markets analyst Peter Dixon says he is not sure there was a clear need for the extension.

He says: “I think it remains quite an open question. I would say that it was not necessary but I suppose the argument is it is not going to do any harm. Having already done the £175bn, about 12 per cent of GDP, sticking a few extra coals on an already blazing fire is not going to make a whole lot of difference.

“Having already expanded the liquidity of the economy quite significantly, a more prudent strategy might just be to sit and wait and allow it to take some effect.”

Threadneedle fixed- income fund manager Sam Hill says the implication is this could well be the last injection of its scale, given the previous announcements of £75bn and £50bn.

Hill says: “This strategy would be consistent with taking on board the improvement in confidence in some indicators that should see output stabilise or grow a little in the next few months. The decision to halve the pace at which the new money is put into the economy also suggests a gradual change to the central bank’s view about how much more support they need to provide to the economy.

But Hill warns that the gilt market could suffer as markets start to anticipate this could be the last Bank of England gilt purchase.

Hill says: “If incoming data on the economy confirms a return to modest growth, the gilt market could struggle because investors will take the view that the Bank of England will not be announcing a further extension to its programme of gilt purchases beyond this latest step of £25bn.”
F&C director of UK equity strategy Ted Scott says the extension came as no surprise after disappointing growth data.

He says: “Many observers felt it may be raised by £50bn, as has been the case in the past. The MPC is signalling it is slowing down its monetary stimulus and is in wait and see mode before deciding if it needs to inject more stimulus via quantitative easing at a later date.”

Scott says the next GDP numbers due in January, will give an indication of the bank’s intentions and following recent indications of manufacturing strength, there is increased optimism that the UK economy should be emerging from recession.

But he warns: “Following last quarter’s surprisingly poor data, nothing can be taken for granted.”

Scott says it is vital that the MPC communicates effectively how it expects its QE programme to work in stimulating recovery because, he says: “The impression is that it is not proving effec- tive except in providing a fillip to risk asset markets”.

John Charcol senior technical manager Ray Boulger agrees that the MPC failed to lay down its intentions for exactly what it wanted to achieve through the programme from the outset.

He says: I think it would have been helpful if when the bank had started the programme in March, it had said, “the intention of quantitative easing is this x, y and z”. They did not really do that. We have heard comments over the past few months from the MPC members but because they only told us the intentions several months after they started the programme, it seemed quite easy to wait and see what happened and then comment.”

Scott likens the strategy of quantitative easing to filling a car with more and more petrol when the engine is broken and calls on the MPC to set out how it intends to get the commercial banks lend- ing again and the broad money supply to grow.

He says: “Also, given the huge amount of money being created by quantitative easing, we need to know the strategy the bank proposes for exiting the programme that is, in theory and potentially in practice, highly inflationary.”

Peter Dixon is unclear as to whether quantitative easing and the recapitalisation of the banking system have succeeded in their goals of boosting lending.

He says: “I do not think anybody knows. There is no reason that because the central bank has recapitalised the banking system that it will necessarily lead to higher lending. I think much depends upon the nature of the capital state of the banks themselves. If banks are in good order or sound, it will help, if not, then it will not.”

Bank of England governor Mervyn King last week predicted CPI inflation would spike above the 2 per cent target in the near term, with experts predicting bank rate is likely to stay low until late 2010.

Dixon agrees. He says: “I do not think interest rates are going to come on the radar screen for a long time to come, we are talking about probably the summer before the central bank really has to think about whether it wants to start to think about their monetary easing. Then there is the debate about how they will actually do that, will it reverse QE? Will it raise interest rates? I think interest rates are on hold for a long period of time.”


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