TELEGRAPH 8.5.09
Policy of 'printing' money is still not yielding results
For those who had hoped this would be the month the Bank of England
dismantled the 'printing presses', yesterday will have been a real
disappointment.
By Edmund Conway
spite of the fact that £51bn has already been spent on government and
corporate bonds and in spite of the remaining £24bn to be spent in
the coming weeks, the Bank's Monetary Policy Committee (MPC) has
judged that it needs to pump more cash into the economy.
Given Governor Mervyn King's recent warning that the Bank may not
extend the quantitative easing operation - through which it is
creating money and using it to buy mainly government bonds - the
decision may have come as something of a surprise. And, there were
plenty of other economic factors that supported the assumption that
the policy would be ended: take, for instance, the fact that
inflation remains stuck above the Bank's target, despite its forecast
in February that it would drop beneath it by this spring.
However, all of this is to miss the point behind quantitative easing.
This radical technique to kick-start an economy is not designed to be
subtle, to be implemented for a couple of months as a fine-tuning
exercise. It is a monetary nuclear weapon, with everything that goes
with that.
The Bank of Japan made the fatal error of withdrawing its monetary
stimulus rather too early in the Nineties and consigned the world's
second-largest economy to many more years of stagnation. The MPC does
not intend to make the same mistake. Moreover, the Committee is aware
that, with the Government now having committed to relatively
restrained spending plans for the next couple of years, more of the
economic grunt-work will have to be done by monetary policy.
Most importantly, in spite of the slight green shoots sprouting - the
increase in the purchasing manager's index for services and
manufacturing sector, and the bottoming out of mortgage approvals -
the key statistics that Mr King and his colleagues are watching to
judge this operation's success have been far less encouraging. The
amount of money flowing around the economy has not taken a major
upwards leap.
The Bank has set a private "soft target" for money growth to pick up
to around 5pc before victory is declared. We are not there yet.
Additionally, gilt yields are still very high. One would hope for
them to come down far lower to denote success. The message is clear:
we need more time to judge this plan's success.
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