The Bank of England decided yesterday that they would call a halt to their experimental, not to say unprecedented, policy of quantitative easing (QE). QE was started in March 2009 and over the following months the Bank bought up £200bn of gilts in the open market from banks and financial institutions. This was aimed at preventing the economy falling into an even deeper recession and pushing increased liquidity into the economy via bank lending.
Has it been successful? It is always difficult to know. How bad would it have been without it? A couple of days ago a think tank, the National Institute of Economic and Social Research estimated that QE had increased output by 0.5% in 2009 and would contribute an additional 1.0% growth this year.
Quantitative easing and interest rates both put on hold.
In making their decision to suspend QE the Bank’s Monetary Policy Committee (MPC) decided that: “…this stock of past purchases, together with the low level of Bank Rate, would continue to impart a substantial monetary stimulus to the economy for some time to come.” The MPC also said that: “…further purchases would be made should the outlook warrant them.”
The MPC is torn between the fact that GDP only increased by 0.1% in the final quarter of 2009 and may require further stimulation. Yet, CPI inflation rose to 2.9% in December, above the 2% target. However, on balance the MPC decided that: “…the scale and persistence of the fall in output means that a substantial margin of under-utilised resources is likely to remain for some time to come. That is likely to mean that inflation will fall below the target for a period.”
The Committee continued to leave interest rates at their historic low of 0.5%.
Tags: Bank of England, CPI, gdp growth, Interest rates, Monetary Policy Committee, quantitative easing
