Quantitative easing: What can we expect in 2012?

Four_Pr._Cent_Reduc'd_Annuity_OfficeThomasMalton1791.jpgWith the UK economy back in negative territory, many commentators expect to see an extension to the Bank of England’s programme of quantitative easing in the near future, in order to attempt to boost growth (See links at the bottom of this page for definitions of what quantitative easing entails).

A new round of quantitative easing could come as soon as midday this coming Thursday (9 February 2012), when the results of the Bank of England Monetary Policy Committee’s (MPC) February 2012 meeting are announced.

But is further quantitative easing a foregone conclusion in 2012?

Quantitative easing in 2012: Desperate measures?

The fact that the Bank is even considering a further easing of policy is testimony to the profound weakness of the UK economy.

This is according to the Guardian’s Larry Elliott. He also argues that there is a case for ending the programme of quantitative easing (rather than extending it further), in order to avoid increased pressure on the economy further down the line. However, he notes that it is much more probable that we will see the MPC announce further quantitative easing come Thursday:

As far as the markets are concerned it is not a question this week of whether the monetary policy committee (MPC) embarks on a third round of money creation under the quantitative easing (QE) process, but rather how big the boost will be.

Other recent suggestions that a third round of quantitative easing appears likely to be announced this week include the following:

  • Some MPC members believe “a further expansion of asset purchases was likely to be required,” according to the minutes of the MPC’s January 2012 meeting.

  • “A February return to the printing presses by the Bank of England look[s] all but certain,” following the news of falling inflation, says the Evening Standard.
  • The IFS says: “We expect the MPC to authorise a further £75 billion of asset purchases at its February meeting, to be completed over the following three months.”
  • Sunday Times Economics Editor David Smith expects to see quantitative easing extended by “£50 billion this week and a ‘final’ £25 billion in May.”

There is also speculation that the MPC could be considering other measures to boost growth, such as improving credit flow to businesses.

What is the upper limit on quantitative easing?

The BBC’s Stephanie Flanders notes that “many economists expect a further £50 billion-plus of quantitative easing once the current programme is complete.”

This would increase the total value of the Bank of England’s “asset purchases financed by the issuance of central bank reserves” to £325 billion.

The Guardian’s Larry Elliott says that “with the economy in its current enfeebled state, there are some in the City who think the total could hit £500bn before the Bank is done.”

But how much further can quantitative easing be extended?

Flanders cautions that we could soon reach “the technical limits of quantitative easing.” This is “the practical question of when and whether the Bank will run out of Government bonds to buy.” She says:

[T]he Bank has set itself fairly clear limits on the kind of bonds it will buy, and how much. If the MPC is still worrying about deflation and recession a year from now, those limits could well start to bind. [... HSBC research suggests that] the MPC has significantly less than £500 billion in government bonds available for quantitative easing in 2012, £275bn of which it has already bought, or is committed to buying in the next few weeks. And that is the absolute limit.

Update 1(Thursday 9 February 2012): Bank of England extends quantitative easing by £50 billion, to £325 billion

The Bank of England announced the decision of the latest monthly meeting of the MPC at midday today (Thursday 9 February 2012). It said:

The Bank of England’s Monetary Policy Committee today voted to maintain the official Bank Rate paid on commercial bank reserves at 0.5%. The Committee also voted to increase the size of its asset purchase programme, financed by the issuance of central bank reserves, by £50 billion to a total of £325 billion.

The MPC offered the following explanation for this latest extension of quantitative easing:

In the light of its most recent economic projections, the Committee judged that the weak near-term growth outlook and associated downward pressure from economic slack meant that, without further monetary stimulus, it was more likely than not that inflation would undershoot the 2% target in the medium term. The Committee therefore voted to increase the size of its programme of asset purchases, financed by the issuance of central bank reserves, by £50 billion to a total of £325 billion.

CBI Chief Economic Adviser Ian McCafferty offered the following immediate reaction to the MPC decision:

The Bank has been signalling that a further extension of the asset purchase programme was likely this month. Even though there are tentative signs that the economy is stabilising, the outlook is still highly uncertain. This new round of QE should help support confidence, though the direct stimulus to near-term growth is likely to be limited.

See also:

  • XpertHR economic commentary February 2012: Squeezed XpertHR’s February 2012 economic commentary – published to XpertHR’s Pay Intelligence blog – examines current threats to UK economic recovery, including the ongoing income squeeze.
  • Q&A: Quantitative easing A useful guide to the basics of quantitative easing, from the BBC.
  • Quantitative easing explained From the Bank of England website. This includes the following: “In March 2009, the Monetary Policy Committee announced that, in addition to setting Bank Rate at 0.5%, it would start to inject money directly into the economy in order to meet the inflation target. The instrument of monetary policy shifted towards the quantity of money provided rather than its price (Bank Rate). But the objective of policy is unchanged – to meet the inflation target of 2 per cent on the CPI measure of consumer prices. Influencing the quantity of money directly is essentially a different means of reaching the same end.”

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