The Bank of England, Quantitative Easing and the Recession: Delaying the Inevitable?
Date Written: February 9, 2012
The Bank of England has today announced, as many had expected, a significant increase in the level of quantitative easing (QE). As such, the committee judged that in order to meet the 2% inflation target in the medium term and to counteract the current economic slack, it is increasing its programme of “asset purchases, financed by the issuance of central bank reserves, by £50 billion to a total of £325 billion.” (1) It is a move that takes overall Bank of England holdings to over one third of the total stock of gilts in issue. The Bank has also announced a key adjustment to its policy regarding the purchasing of conventional gilts, namely that “the maturity sectors will be defined as 3-7 years, 7-15 years and over 15 years” rather than 3-10, 10-25 and 25+ as they had been previously. (2) Interestingly then, the Bank is shifting the balance of its purchases towards shorter-term bonds.
The Fed, on the other hand, has proven far less decisive this week with regards to further QE and the proposed $9 billion takeover of ING Direct by Capital One, with a decision on the latter being postponed to this coming Monday. In terms of the former, The Fed must decide whether to “increase its holdings of long dated securities and if so whether to focus once again on government debt, or to re-open its purchases of mortgages.” (3)
The question remains then, is QE still working? Central bankers remain positive with the vast majority of them clinging to the belief that “additional asset purchases can further reduce long term bond yields at a time of zero short term interest rates, but also that this can increase real GDP growth, compared with what otherwise would have occurred.” (4) I, however, am not so sure; perhaps we should place less emphasis on QE, a somewhat blunt and ineffectual tool, and consider the Keynesian approach, that is, boosting demand through fiscal stimulus. As history has shown, Keynesian theory is recession economics and given that we are in real danger of a double-dip recession I suggest we place greater faith in Keynes.