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:
Comments (0)
This discussion is now closed. We welcome comments on our articles for a limited period after their publication.

  • Most Popular
  • Most Shared

REUTERS SHOWCASE

Press Event

Press Event

Modi takes tea, but no questions, in first press event as PM.  Full Article 

Monetary Policy

Monetary Policy

Finance Minister Arun Jaitley favours interest rate cut - paper  Full Article 

Sundar Pichai Elevated

Sundar Pichai Elevated

Google's Pichai to oversee major products and services.  Full Article 

Reuters Poll

Reuters Poll

India's growth pace to pick up as reforms draw investment   Full Article 

Need For Reforms

Need For Reforms

Euro zone risks "relapse into recession" without structural reforms - Draghi.  Full Article 

Diwali Sales

Diwali Sales

Gold sales jump about 20 pct for Diwali - trade body  Full Article 

World Bank Rival

World Bank Rival

Three major nations absent as China launches W.Bank rival in Asia  Full Article 

Health Of Lenders

Health Of Lenders

25 European banks set to fail health checks - sources.  Full Article 

Reuters India Mobile

Reuters India Mobile

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