The BoE began the scheme in March as part of its new remit to control the economy with meas-ures beyond interest rate changes.
The Treasury gave the monetary policy committee powers to boost money supply by effectively printing more cash and then using that to buy Government-backed bonds from investors.
Chancellor Alistair Darling gave the MPC the green light to create £150bn of new money in the hope that it would trickle down through the system and ultimately help boost new lending to businesses and individuals.
There has been scepticism from some quarters over its success. Last week, lending figures for April from the BoE revealed that lending to businesses fell by £4.7bn and that lending to individuals increased by £1bn month on month.
John Charcol senior technical manager Ray Boulger says: “Despite the bank having used about £75bn of the new funds, it is hard to see a visible impact of this so far in terms of any real increase in mortgage availability.”
Boulger adds that with the housing market perf-orming better than virtually all the forecasts predicted at the end of last year, the modest extra mortgage demand generated may be outstripping supply.
Threadneedle fixed-interest fund manager Sam Hill says: “The money supply data released this week suggests that, at the core level, there is not yet any evidence that this newly created central bank money is feeding through.
“It is highly likely, given the message from the May inflation report, that the MPC is not going to be distracted from the current policy stance, even if the business and consumer confidence surveys continue with their recent revival.”
Henderson New Star chief economist Simon Ward believes analysts are wrong to look at the credit situation as these figures can lag behind money supply, which is on the increase, as institutions cannot raise their lending until the supply is there. Last week, the bank revealed M4 – overall money supply – was up by 1 per cent in April.
Ward says: “I think the easing is working. The key measure of success is whether it boosts the broad money supply and that has been growing more strongly since quantitative easing started three months ago.”
He believes the next £50bn of asset purchases, which will come before the BoE stops its gilt buying in July, should create more of a boost to money supply in the coming months.
Ward says: “A lot of people have the view that bank lending has to pick up but I do not think that is key. If you boost the money supply, that will filter down and generate a recovery. In time, lending will have to pick up but the most important thing is to boost money supply.”
Royal Institution of Chartered Surveyors chief economist Simon Rubinsohn goes further than Ward, saying there are signs that the programme is starting to improve confidence. He says: “Tentative signs that this strategy is beginning to pay dividends are evident. We are seeing a modest improvement in sentiment in the housing market and the service sector as well as less negative news from the high street.”
Where does the bank go from here?
Opinions are clearly divided but the MPC has confirmed it will be pressing ahead with at least £50bn of gilt purchases over the next eight weeks on top of around £75bn it has already spent and with the potential of a further £25bn at its discretion.
Schroders chief economist Keith Wade says once this money has been spent it might be time to pause for reflection. He says: “Most economists like myself did not know how this would work. It is uncharted territory. The key thing is the link between the increase in bank deposits and the increase in lending, that is the real uncertainty.
Wade says that reviewing how banks use their share of the new money supply will decide the success of the quan-titative easing plan.
He says: “This is the bit where it could all fall down. The banks might stay cautious as they have had a terrible shock with share prices and they may just want to gradually build up their capital. If this is the case, they will not lend a lot and there will be no effect.”
House prices have increased according to both Halifax and Nationwide, with Rics recently reporting an upsurge in interest and activity.
But will £150bn be enough to jumpstart the UK economy?
Ward says it may be enough but to be sure, the MPC will need to look carefully at the money supply and lending data over the coming months.
He says: “If I were on the committee, I would want to extend quant-itative easing another month until the end of August. Beyond that, it will depend on the money supply growth at the end of the period.”
Wade believes the MPC may get a further £100bn to extend the programme but could use this money more slowly over time but he adds: “I think they will want to pause and see what they have done. This is a subst-antial amount of money.”