‘No gain without pain’ is Bean’s message on quantitative easing

By Erikka Askeland
Published on Wednesday 22 February 2012 00:00

QUANTITATIVE easing (QE) has caused “unpleasant side effects” for the UK economy, the deputy governor of the Bank of England admitted last night.

However, Charlie Bean, who was speaking to an audience of business people in Glasgow, credited the bank’s asset buying policy for preventing unemployment from rising further and easing the “task of fiscal consolidation and deleveraging”.

He said the latest £50 billion round of QE unleashed earlier this month had prevented the bank from undershooting its 2 per cent inflation target “in the medium term”.

He acknowledged that QE has “proved controversial”, critics having said it is not effective in stimulating demand and has reduced pension pots for people buying annuities. But he argued that, while pensions yields were reduced, asset buying had also boosted the value of the pension pots. Bean said: “The stance of monetary policy needs to be loose in order to sustain demand. Treating serious medical conditions has unwanted side effects. But, unpleasant as those side effects sometimes are, treatment is invariably better than the alternative.

“So it is with the economic medicine of low interest rates and quantitative easing.”

He added: “The immediate consequences may be unpalatable, but the sooner we can get the economy on the mend, the sooner we can return policy to more normal settings and the better it will be for all of us – savers, businesses and employees alike.”

Bean told members of the Scottish Council for Development and Industry that the Bank’s first bout of QE in 2009 had reduced bond yields by 1 per cent and boosted demand for gilts by 1.5 to 2 per cent.

But while UK equity prices rose 50 per cent during the programme, “only a small part of that is likely to be down to” QE, he added.

In total, the Bank’s asset buying programme has now reached £325bn after the monetary policy committee resumed its purchases of government debt. This amounts to “about a fifth of the annual output of the UK and around a third of the total stock of UK government debt in issue,” Bean said.

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