What the experts think of the QE extension
December 4, 2009
Following the most recent Monetary Policy Committee meeting the Bank of England announced that the base interest rate was to stay at its all time low level of just 0.5 percent for the eighth month in a row, in the hope that the lower base rate would help to increase affordability and boost the economy. This came after news that the UK was still in recession, with a drop in growth for the third quarter - something that came as a shock to most industry experts.
In addition to announcing that the base rate would remain at 0.5 percent the central bank also announced that it was extending the quantitative easing scheme, which was already £25 billion above the original budget of £150 billion. The decision had been made to extend it by a further £25 billion, taking the total amount up to £200 billion for quantitative easing. The decision was met with mixed responses, with some believing that the extension of the scheme could help to boost the economy and others believing that the government was simply throwing good money after bad.
An official from RBS said: “We were in the £25bn camp, so that was broadly as expected. The tone of the statement was a little bit more upbeat than was the case in August at least in terms of the global recovery being led by emerging market economies. There was also acknowledgement that several domestic indicators were suggesting some pick-up so they may be a little bit less sceptical about some of the forward-looking surveys. It sounds like the profile for inflation will be closer to 2% and beyond that it’s going to hover close to target. They seem relatively comfortable with the inflation outlook, not quite closing the door on further QE but signalling they may be near the end of the purchases. I think we’re more clearly within sight of the finish line.”
Howard Archer from Global Insight stated:” The fact that the MPC decided to limit the increase in QE to £25bn and to enact it at a slower rate over the next three months suggests that they believe that the economy is on a modest recovery track despite the shock third-quarter GDP contraction but could do with some extra help, especially as money supply growth and bank lending remain disappointingly muted. We suspect that this will be the final extension to the QE programme unless the economy suffers a major relapse in 2010. The BoE may well be reluctant to further extend QE given recent stickier than anticipated inflation and sterling’s weakness, although the statement accompanying today’s decision indicates that the central bank still expects consumer price inflation to be limited for ’some time to come’ by substantial under-utilized capacity.”
An economist from Investec said: “It’s not a huge shock that QE has been expanded by £25bn pounds but it would be interesting to learn why the committee has gone for a smaller expansion of asset purchases than previously. That might reflect some concerns over the medium-term inflation background or a big split on the committee. There didn’t seem to be anything radical in the statement. We do note that the MPC simply said that GDP continued to fall in Q3 without expressing any scepticism over the extent of the decline. We presume looking forward that this marks the end of the easing cycle, providing the economy does pick up as expected. But these are unusual times and as the past couple of years has shown you simply cannot rule anything out.”
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