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QE to be questioned

Experts will question the effectiveness of the £200bn fiscal stimulus on Thursday as the Monetary Policy Committee is expected to call time on quantitative easing.

The Debt Management Office ceased buying gilts last week after it reached its £200bn limit, but the experts will question whether the stimulus has had any real positive effect after the Office of National Statistics revealed the UK barely crawled out of the recession at the end of last year, with GDP growth of just 0.1 per cent in Q4 2009.

The Bank of England also revealed weak money figures this week – broad money, which the Bank of England has been aiming to increase through the stimulus, decreased by 1.1 per cent in December. Henderson New Star economist Simon Ward says the data suggests people are responding to “reviving confidence” and are preparing to spend more, but other experts are still searching for evidence of the stimulus’ success.

Inflation jumped by 1 per cent in December to 2.9 per cent. MPC minutes say this is a spike and will drop down by March but experts have warned the UK has a difficult balancing act between keeping inflation down and making sure money supply expands while at the same time preparing for significant cuts in public spending after the general election.

Barclays Capital analyst Simon Hayes says: “The ongoing weakness in the money and credit data remains a major headache for the MPC. Current rates of growth are simply inadequate to generate on-target inflation in the medium term.

“There remains a huge question mark over the effectiveness of easing in terms of its influence on demand and inflation.”

The MPC has so far injected an amount close to 15 per cent of GDP in nine months. Commerzbank analyst Peter Dixon says the MPC will hold firm on Thursday as it now holds around a quarter of the total stock of public debt.

He says: “Whilst the jury remains out on whether the policy will ultimately be effective, it has so far not operated as expected. Far from boosting domestic demand, the policy has impacted primarily upon asset markets, and the question of what happens when the policy is ended remains open.”

Ignis economist Stuart Thomson says the MPC’s inevitable freeze on quantitative easing will only add to macroeconomic volatility.

He says: “Economics is simple; if you throw enough money at an economy it will grow. If you withdraw that liquidity, while the banks’ balance sheets are still impaired, then this recovery will quickly retreat into recession.”

Travelex head of UK trading desk Mark Bolsom says regardless of economic data and forecasting, investors remain incredibly cautious about the UK’s economic recovery – he says this is illustrated in sterling’s continued falls against both the euro and the dollar.

He says: “All eyes are on the Bank’s verdict and until then, investors will not take any long positions on sterling. It is doubtful that its conclusion will do much for sterling in the long term, given investor concerns about our burgeoning budget deficit.”

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