The idea of injecting a second round of QE into the UK economy may have seemed inconceivable a few months ago, but as the minutes of the July MPC meeting reveal, a new loosening programme is an acute possibility.
During the meeting, it was disclosed members had entertained another bout of loose monetary policy for the first time since February on fears growth could be hit by George Osborne’s emergency Budget.
However, ONS data last week revealed UK growth rose unexpectedly by 1.1% during the second quarter, the fastest growth for four years. Some commentators believe this is a sign the country has averted a double-dip recession, while others warn this surprise surge is just an indication of a patchy recovery.
Meanwhile across the Atlantic, the head of America’s central bank, Ben Bernanke, said last month, the Fed was ready and prepared to apply more quantitative easing in the US if it was necessary, and with leading indicators such as unemployment and housing data looking negative, more QE cannot be ruled out.
But if more QE is on the cards, will it do the job of stimulating both economies? When should the new programmes be implemented and for how long? And what amount is required to have the desired effect?
The first round
Neptune’s chief economist, James Dowey, believes another injection of quantitative easing is inevitable because the first round of monetary policy made almost no impact in reducing the rate of unemployment in either country.
He says 1.1% quarter on quarter growth is good news for the UK, but the Bank of England (BoE) still needs to remain “extremely accommodative and will do so”, including providing more QE if necessary.
“The key risk for the UK in the next 12 months remains that of not enough growth, rather than too much inflation. QE is the only tool available at the moment should that risk materialise.”
He thinks the two central banks have little choice as there is such political opposition to further fiscal stimulus.
“Unless data coming through turns positive, which has not been the trend recently, we are very likely to see more QE,” he says.
Dowey believes it is hard to predict the impact of another loosening programme, but policymakers will want to reflate the economy, counter deflationary pressures and boost the supply of credit.
He says: “If you look at the supply of credit in both economies it has fallen. Commercial bank credit in the US is drifting down, which is rare. It is on a constant downward march.”
Better than expected
F&C’s Ted Scott agrees more QE in the UK is likely, despite “better than expected” growth figures. He says: “GDP growth has taken the immediate pressure off the MPC but my view is the growth profile will be fairly lacklustre and it is likely we will see more QE early next year to inject extra liquidity into the market.”
Scott also believes there will be more QE in the US. He says: “Over the past two to three months, evidence has suggested the economy is slowing and the housing market is in trouble so there is likely to be more credit easing.”
He expects the Fed to act before the BoE, saying the US’s philosophy is to stimulate the economy out of recession.
Whether more QE will be successful or not is hard to forecast, Dowey says. “It’s impossible to say but I don’t see there being much downside risk, so why not? One risk is it will push inflation too high but there are so many deflationary pressures it’s worth it.”
Coalition priorities
In the UK, the coalition Government has repeatedly expressed its priority to get the country’s finances in order. Dowey says a specific problem is the lack of credit supply and, therefore working capital, for small businesses.
“More QE will not help the fact small businesses are not getting credit. The banks say they are fulfilling their obligations to lend to SMEs but it seems the fees for every transaction are deterring business owners.”
Dowey says the timing of the next round of QE will be event driven rather than date driven. But, he believes looser monetary policy is needed now.
“In the US, with core inflation under 1% and unemployment at 9.5%, more QE is needed. In the UK unemployment is not as bad but it’s bad enough to warrant more QE.”
In terms of size, he thinks there will be a similar amount injected into both economies as was initially last year – $1.25trn and £200bn by the Fed and BoE respectively.
However, Scott thinks the second round of QE in the UK will be smaller than the first: “They could start at £25bn and see if it has the desired effect. They should leave their options open.
Market freefall
“Last time QE restored confidence in the markets by providing extra liquidity. In March 2009 there was significant concern over the possibility of deflation or depression. QE alleviated these fears but did not get money flowing. It was critical, however, when the markets were in freefall.”
Meanwhile, Schroders’ European economist, Azad Zangana, thinks more QE in the UK is unlikely, after the recent growth figures.
He says: “Up until the figures came out there were indications from the MPC of more easing but now there’s the potential of increasing interest rates instead.”
However, he believes there will be more monetary loosening in the US. “Growth is losing momentum and jobs growth has been disappointing. The US has been more cautious recently with statements.
“We have seen a slowdown and whether that slowdown will continue for three or six monthswill dictate when there will be more QE.”
He also says the type of growth not just the size of growth is important: “It’s not just about inventory building but also final consumption and investment.”
He predicts the second round of loosening will not be as big as the first because last year the economy was contracting whereas now the recession has been replaced by a slowdown.
