Is quantitative easing working?
When the Chancellor of the Exchequer, Alistair Darling, first announced plans for quantitative easing in the UK he said that £75 would be allocated for the scheme with an additional back up of a further £75 billion if necessary.
This made a total of £150 billion for the quantitative easing scheme, which the government hoped would help get the UK’s economy back on its feet.
However, following this a further £25 billion was pumped into the economy through quantitative easing bringing the total to £175 billion. However, earlier this month, following the Monetary Policy Committee meeting, the Bank of England announced that it was keeping the base interest rate at 0.5 percent for the eighth month in a row and was ploughing yet another £25 billion into the economy through quantitative easing.
This has now brought the total amount allocated to the QE scheme to £200 billion.
Following the latest announcement that the scheme was being extended many people were surprised. Some had thought that the central bank was going to extend the scheme by a further £50 billion rather than £25 billion given that the UK was still in recession, and others had not been expecting any extension at all. Some industry groups welcomed the decision to extend the scheme again this month.
However, there are many who feel that the scheme is not working and that the government is simply throwing good money after bad in a bid to breathe life into the economy and its scheme is not working.
One industry official stated: ‘It is all very well extending the programme, but the cash has to get into the broader economy, and it isn’t.’
One economist summed it up by adding: ‘If you keep doing the wrong thing, doing more of it doesn’t make it any better. The Bank seems to believe quantitative easing is having a positive impact. We are far less convinced.’
Another said: ‘They are starting to take risks. I don’t think the recent data really suggested further stimulus was required.’
And one industry professional stated: ‘It is like filling a car with more and more petrol when the engine is broken.’
Even the Bank of England has issued a warning that recovery will be slow, having been affected by a severe lack of credit. The central bank stated: ‘Output has fallen almost 6% since the start of 2008. Households have reduced spending substantially and business investment has fallen especially sharply. Gross domestic product continued to fall. A number of indicators, however, suggest that a pick-up in economic activity may soon be evident.’
The NIESR recently issued its summary on the economy, stating: ‘Our monthly estimates of GDP suggest that output fell by 0.4% in the three months ending in October, following on from a similar decline in the three months ending in September. The buoyancy of industrial production in September is good news, but a rise between May and July petered out with renewed weakness in August. The profile of the economy suggests that the current depression is probably slightly worse than the experience of the early 1980s but not as bad as that of the early 1930s.’
