David Bell: Quantitative easing the only tool left to stimulate growth

Published on Friday 10 February 2012 00:00

The Bank of England’s rationale is that without some further monetary stimulus, inflation is likely to fall below its 2 per cent target. The QE injection will offset the expected fall in bank lending forecast by the Ernst and Young Item Club.

The QE injection will offset the expected fall in bank lending forecast by the Ernst and Young Item Club.

It expects total lending by the banks to fall by 2.2 per cent this year. Corporate loans will decline by 5.7 per cent, which will particularly hit small and medium-sized firms.

The Bank of England has analysed previous rounds of QE and concluded that their effects on the economy were positive. Specifically, QE was equivalent to a cut in the bank rate of between 1.5 and 3 per cent. Of course, with interest rates already at 1 per cent, a direct reduction in interest rates of this magnitude by the MPC was unlikely to occur. Negative interest rates have occurred in some countries, but very rarely. In the future, if the economy starts to grow vigorously, the Bank could sell bonds back into the market.

This would have the opposite effect to QE. This process would reduce the price of bonds, increasing their returns, which would make pensions cheaper. This looks unlikely to happen in the near future: the state of the UK economy is so precarious that strong growth is unlikely. For the moment, QE is the last weapon in the monetary arsenal.

• David Bell is professor of economics at Stirling University

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Broon Bairn

Friday, February 10, 2012 at 02:18 PM

Is neo-Keynesian, demand-management economics dead? Is Rooseveldt's "New Deal" not a good enough template for current problems?

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douglas-home rule

Friday, February 10, 2012 at 01:20 PM

The most succesful European economy, Germany, does not agree with printing money for excelent historical reasons. It devalues the currency and injects inflation into the economy.

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Broon Bairn

Friday, February 10, 2012 at 10:33 AM

I wish they'd cut out the economic gobbledygook. What they're saying is :"We have the answer - print more money".

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Ron Greer

Friday, February 10, 2012 at 09:50 AM

How about a public revenue stream that's unavoidable( even by nondoms) and removes inhibitory pressures on labour, entrpreneurial dynamism, and bricks and mortar property development-upgrades? It's there Professor, but you just can't see it, because you are just not looking.

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