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Quantitative quid pro quo quandary

Financial experts question whether printing £75bn in Treasury bills will improve lending in the UK.

The Bank of England last week set out its quantitative easing strategy which will involve printing £75bn in Treasury bills, which it will swap for bank assets.

The BoE considers that the measure will “boost the supply of money and credit and in due course raise the rate of growth of nominal spending”.

But experts question whether this money will trickle down in the form of new lending and improve spending.

New Star economist Simon Ward says: “The initial purchase of assets will boost the money supply but there is a question of the second-round effect of the banks passing on this credit. I would be sceptical about that as banks are obviously capitally constrained.”

Pension consultant Ros Altmann says: “The Government is determined to keep pumping money into the banks in the apparent hope that the money will then filter out of the banking system into the rest of the economy. But the banking mechanisms are blocked by past bad debts and velocity has plummeted, so it may just stay inside the banks. For one sector of the economy to be given such precedence over all others is hugely dangerous. We are told that the banks are too big to fail but one has to now wonder whether, in fact, they are really too big to save.”

Morgan Stanley analyst David Miles says: “Whether this works depends on why banks are not lending now. Is it a lack of funding or concern because of the economic outlook?

“No one has a good idea on which of these is the domin- ant factor today and so we cannot have a lot of faith that quantitative easing will directly boost lending.”

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