Quantitative Easing programmes ‘may not work’, say BIS

News Article - 14 December 2011
Category: Business

The UK Department for Business, Innovation and Skills (BIS) believes the Government's Quantitative Easing (QE) programmes may not have the impact required to provide the stimulus the national economy so desperately needs.

The BIS feels that although QE programmes quickly improved financial markets in the short term, the effects became smaller for later extensions.

Despite concerns regarding the negligible influence of QE for the economy, analysts say the Bank of England may decide to increase their programme to as much as £500 billion if the economy still doesn't show signs of recovery by February.

However, in its quarterly report, the BIS outlined the reasons why increasing money printing programmes will now only have a limiting effect.

"In terms of programme size relative to the amount of outstanding debt, the purchases might be subject to diminishing returns.

"First, yields are already very low, and the scope for further reduction becomes smaller as more purchases are carried out.

"Second, it may be harder to achieve the same effectiveness once the surprise element wanes. Third, central banks face risks associated with large holdings of securities.

"For instance, it may affect inflation expectations. Also, it can be difficult to unwind large asset holdings in a way that does not roil markets."

These comments come as a leading economist forecasts an "outright recession" for the UK next year.

Gerard Lyons, Standard Chartered's chief economist, believes the UK's economy will contract by as much as 1.3 per cent in 2012, much more than the Government's official forecast of a 0.1 per cent contraction in Q4 2011.

The latest BIS report appears to contradict comments made by Bank Deputy Governor, Charlie Bean, who said last month: "So far, we haven't seen anything to suggest this round of purchases is operating in any way differently from the way it did the first time round."

According to the Bank, QE encouraged GDP growth by as much as 2 per cent, but simultaneously lifted inflation by a further 1.5 per cent.

The BIS accepted that QE has "proven to be useful in these extraordinary times" but remains concerned a threat of "diminishing returns" could prove wholly damaging.

Article keywords: quantitive easing, bis, bank of england

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