BREAKINGVIEWS - BoE's QE2 is uncertain lifeboat in euro storm

Fri Oct 7, 2011 7:03am IST

The Bank of England is seen against a blue sky in the City of London October 6, 2011. REUTERS/Suzanne Plunkett

The Bank of England is seen against a blue sky in the City of London October 6, 2011.

Credit: Reuters/Suzanne Plunkett

Related Topics

(The author is a Reuters Breakingviews columnist. The opinions expressed are his own)

By Ian Campbell

LONDON (Reuters Breakingviews) - The Bank of England has launched its lifeboat early. Its calculation is that the euro storm, bad now, may get a lot worse, with worrying implications for UK banks, exports and growth. But whether the monetary lifeboat can keep the UK economy from sinking will remain in doubt. If the purchase of 75 billion pounds of government bonds isn't enough, there may well be more -- but also calls for bolder fiscal policy.

The central bank has been brave. It is ignoring the current 4.5 percent rate of consumer inflation and launching a lifeboat that is bigger than expected, to try to move markets. Gilt yields will be lower. That should bring down rates on long-term loans and mortgages. Stocks may be buoyed. And the pound may be softer -- at least against the dollar.

The aim of the new quantitative easing programme, QE2, will be to boost the money supply, confidence, credit and GDP growth. The risk of disappointment is large. The knock-on effects of QE1 have not been impressive. The broad money supply has contracted by 1.1 percent in the past year and lending to businesses is down by 4 percent. But it would have been worse without QE.

The already frail UK could easily start sinking if the euro zone crisis leads to a regional decline. The UK's Monetary Policy Committee must be surprised by the European Central Bank's cautious decision not to cut its own interest rate.

The British government, like the central bank, believes in action now. The otherwise bold BoE may however resist government pressure to find ways to channel credit direct to companies. But its two rounds of bond purchases are meaningful. They will amount to 275 billion pounds, close to matching two years of the UK government's enormous deficit. Any upward pressure on government financing costs has been avoided.

That helps to give the government room to amend fiscal policy should recession hit. The government would have to make that risky decision. But the BoE can say it put its own boat out.

CONTEXT NEWS

-- The Bank of England's Monetary Policy Committee voted on October 6 to keep the bank's benchmark interest rate at 0.5 percent but increase the size of the bank's asset purchase programme by 75 billion pounds to a total of 275 billion pounds.

-- The central bank said that the pace of global growth had slackened, especially in the UK's main export markets. It warned that "vulnerabilities associated with the indebtedness of some euro-area sovereigns and banks" had resulted in severe strains in bank funding markets and financial markets more generally. These tensions "threaten the UK recovery", the bank said.

(Editing by Edward Hadas and David Evans)

FILED UNDER:

Religion and Politics

REUTERS SHOWCASE

Fund Raising

Fund Raising

Flipkart raises $700 million in fresh funding.   Full Article 

Reforms Push

Reforms Push

Modi may order insurance, coal reforms if vote delayed - officials.  Full Article 

Reuters Exclusive

Reuters Exclusive

India looks to sway Americans with nuclear power insurance plan  Full Article 

To Boost Growth

To Boost Growth

Crank up public spending to revive growth - chief economic adviser.   Full Article 

Bold Steps

Bold Steps

SpiceJet rescue plan marks bold bet on Indian aviation recovery.   Full Article 

New Airline

New Airline

Tata, Singapore Air venture Vistara to take off on Jan 9.  Full Article 

Online Sales

Online Sales

Knock knock. Who's there? Amazon's best-selling holiday author.  Full Article 

Hacking Attack

Hacking Attack

N.Korea says did not hack Sony, wants joint probe with U.S.  Full Article 

Reuters Poll

Reuters Poll

BSE Sensex to hit 32,980 by December 2015  Full Article 

Reuters India Mobile

Reuters India Mobile

Get the latest news on the go. Visit Reuters India on your mobile device  Full Coverage