More quantitative easing: but has it worked?
March 2012 marks three years of the UK’s quantitative easing programme and the Bank of England is ready to continue with QE3. But has it worked? And how do we unwind this massive experiment in monetary manipulation?
Even before the third phase of this programme of buying in debt – mainly government gilts – the Bank has spent £275bn of our own money to buy our own money. That’s an average of £7.5bn a month, but since QE2 was launched in October 2011, the monthly rate has been running at £12.5bn.
And what have we to show for that? The Bank of England claims that a move aimed at making borrowing easier when interest rates are already down to a half per cent has added between 1.5 and 2 per cent to the UK GDP. If that’s true, then there has been precious little growth anywhere else in the economy so we should be grateful to the Bank.
But it admits that the programme has increased inflation by 0.75 to 1.5 per cent. Against the fears of Zimbabwe-style price rises (or 1970s-style) that is small and it is unfortunate or unlucky that it added to a rate that was already so far above the 2 per cent target.
QE may have held down borrowing costs – but even the UK government still pays 2 per cent on gilts, not the Bank’s imaginary half per cent. However there are losers, not least those having to buy annuities during the period of the QE experiment. Annuity rates have been pushed down to record lows and those forced to accept them will not only suffer diminished pensions for the duration of the financial crisis but for the rest of their lives. They are paying heavily for quantitative easing.
The QE programme started at £200bn in March 2009. Another £75bn was added in October 2011 either – depending on your view - because the first tranche wasn’t working or because it was working so well. Now it is being increased again. But where will it stop? Some think the Bank will have to double the QE total so that it holds almost half the country’s gilts, equivalent to nearly half the nation’s annual GDP. And still we may be asking, has it worked?
Yet at some point, the Bank has to start selling those gilts again to unwind these positions, and if QE has worked by buying in debt, won’t the opposite effects come from the sale? If that means lower inflation, good. But lower growth and higher borrowing costs will hurt the economy. And even if annuity rates recover, that will be not help to the millions forced to lock into the current low rates: they will pay for QE for ever.
