QE or not QE, and is that the question? | EEF

QE or not QE, and is that the question?

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This coming Thursday the MPC will make its monetary policy announcement. Global economic indicators continue to suggest a weakening recovery, and following last month's unanimous decision to keep rates on hold, no-one is expecting the committee to raise rates this month.

But there is some talk about increasing quantitative easing as a way to stimulate the recovery. Adam Posen has long been the lone voice on the MPC calling for increased QE, as he did once again in an article for Reuters on Wednesday.

His argument in favour of QE is as follows:

The evidence is clear that the Bank of England's and the Federal Reserve's asset purchases had a positive significant effect on consumption, on the relative prices of riskier assets, on credit availability, and on liquidity in the financial system. If the improvement was insufficient, because the response to a given injection was less than some hoped, increase the dose.

In other words, Posen believes QE works, and if it doesn't work as well as it should, do more.

But is QE the right policy tool now? Today Allister Heath from CityAM argued that more QE would be wrong for the UK Economy saying that while there had been a slowdown recently “the British economy doesn't need another boost to the money supply”. He has two key reasons for making this argument:

  1. There is potentially too much liquidity in the economy and more QE could exacerbate this, and may also lead to asset price bubbles
  2. What the UK really needs is lower inflation and greater certainty

While I agree that low inflation and certainty are very important for companies, Adam Posen's article offers enough reasons to think that inflation could go down as well as up in the next year or so.

The first point is therefore more pertinent. There may indeed be too much liquidity in parts of the economy, in which case more QE could lead to the asset price bubbles and other problems that Heath's article raises. But there are still areas of the economy where there is not enough liquidity and this is choking off growth – just ask companies who are unable to get loans at the moment.

And that raises the real question – does QE create liquidity for the people and business who need it? And if it doesn't, then what will?


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