TELEGRAPH 6.11.09
Bank of England signals the end is nigh for quantitative easing
We are reaching the endgame for quantitative easing, experts declared as the world’s major central banks indicated that they may soon bring the radical monetary policy experiment to an end.
By Edmund Conway and Angela Monaghan
On a jittery day for the currency and government debt markets:
== the Bank of England voted to slow the rate of asset purchases it is making through quantitative easing (QE) to the lowest speed since it introduced the policy in March.
== The President of the European Central Bank, Jean-Claude Trichet, heralded an economic recovery in the early months of next year and said that the ECB may not extend its own radical monetary easing scheme.
==Traders digested the Federal Reserve’s strong hint on Wednesday night that it is poised to embark on a so-called “exit strategy”, as markets recover.
The news pushed the pound up by a cent against the dollar at one stage, and lifted gilt yields higher as traders contemplated the impending end of QE. It came amid fresh evidence that some parts of the UK economy are now recovering from the longest and deepest recession in recent memory.
The Monetary Policy Committee voted to leave interest rates unchanged at 0.5pc and to extend QE by a further £25bn to a £200bn ceiling. The extension to the scheme – in which it is creating money to buy debt and boost the wider economy – was less than many expected, and means it is buying around £2bn of debt each week, compared with £4bn in previous months and almost £7bn before that.
In a statement accompanying the decision, the committee said that the economy had undergone a sharp contraction, but expressed hopes for a recovery. It said: “Output has fallen by almost 6pc since the start of 2008. Households have reduced their spending substantially and business investment has fallen especially sharply. Gross domestic product continued to fall in the third quarter. A number of indicators of spending and confidence, however, suggest that a pick-up in economic activity may soon be evident.”
The decision coincided with some encouraging news from the manufacturing sector. New car sales jumped 31.6pc in October as buyers took advantage of the Government’s car scrappage scheme, the Society of Motor Manufacturers and Traders said.
Separate data published by the Office for National Statistics showed that industrial production rose by 1.6pc in September – the strongest increase since 2002. However, buried in the manufacturing data were revisions to previous months’ figures which showed that production fell by 0.8pc in the third quarter overall – worse than the 0.7pc fall assumed by the ONS in its first estimate of third-quarter GDP. It dashes hopes that the ONS will revise up that surprise fall in GDP, and cements suspicions that the UK is still mired in recession.
In a further blow, the National Institute of Economic and Social Research (NIESR) suggested that the fourth quarter got off to a bad start, with the economy contracting 0.6pc in October.
“Any buoyancy we hoped for hasn’t quite come through. There may well be stops and starts, but our view overall is that the economy will return to growth over the fourth quarter,” said James Mitchell, research fellow at NIESR.
Across the Channel, however, Mr Trichet said he saw encouraging signs of recovery in the eurozone. He said: “Not all our liquidity measures will be needed to the same extent as in the past.”
He is the first major central banker to designate an end to extraordinary monetary policy – although the Fed is also using increasingly upbeat language.
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FINANCIAL TIMES 6.11.09
Bank tries ‘last heave’ with £25bn boost
By Daniel Pimlott and Chris Giles
The Bank of England will pump another £25bn into the economy, which remained mired in recession in the third quarter, in what was described as “one last heave” to propel growth.
The pace of cash injections as part of the so-called quantitative easing programme over the next three months will be slowed, however, in line with what the Bank regards as a slightly brighter economic outlook. The extension of the programme will bring its total cost to £200bn.
The Bank’s move puts it in line with the Federal Reserve and the European Central Bank, which have taken decisions this week cautiously signalling an end to the extraordinarily loose monetary policy used to combat the financial crisis.
Economists predicted that this would be the last time the Bank acts to boost the stimulus in this recession and by the middle of next year it will be thinking about raising interest rates.
Michael Saunders, economist at Citigroup, called the expansion of asset purchases “one last heave”, while Simon Ward at Henderson Global Investors said “the message seems to be that this will be the final slug barring an economic shock”.
Financial markets took the move in their stride with the yield on government bonds closing 0.07 percentage points higher at 3.859 per cent. Sterling edged higher. The Bank’s monetary policy committee said in spite of the failure of the economy to pull out of the recession in the third quarter, a “number of indicators of spending and confidence . . . suggest that a pick-up in economic activity may soon be evident”.
But it warned that while loose monetary and fiscal policy and the weaker pound should aid a recovery, continued weaknesses in bank lending and debt-laden households would prevent a return to boom conditions.
The MPC believes the escape from recession will be gradual, leaving large amounts of slack in the economy that will bear down on inflation for some time.
Business groups welcomed the committee’s decision to pump more money into the economy and warned that a faltering recovery might force further moves in the months to come.
With interest rates at 0.5 per cent, almost as low as they can go, and the perilous state of the public finances making any further fiscal stimulus tricky, quantitative easing is now the main tool available to policymakers to tackle the downturn.
But the extent to which the programme has lifted the economy remains unclear. The MPC says the asset purchases have “helped to boost asset prices and improve access to capital markets”.
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