ITEM Club ‘sceptical’ about effectiveness of increasing size of asset purchases
Nida Ali, economic advisor to the EY ITEM Club, comments on today’s MPC decision
- Interest rates remain on hold
- Implementation of more QE this month was unexpected, but isn’t entirely out of the blue
- This comes amid the Bank’s forecast that inflation will cross 5% in the coming months
- In our view increasing the size of asset purchases has now crossed its buy-back date and we are sceptical about its effectiveness in boosting growth
“It was unexpected for the Bank to implement QE this month, but with increasing evidence that the recovery is faltering, especially with yesterday’s revisions to GDP in Q2 and earlier, it wasn’t entirely out of the blue. It has been a trend for many years that the Bank takes crucial monetary policy decisions in light of the inflation report. But this time, the fact that the Bank has opted for further asset purchases even before November’s inflation report, reflects the extent of the urgency among MPC members to keep the economy afloat.
“It is worth noting that according to the Bank’s forecast, inflation is likely to cross 5% in the coming months. However, it is clear that concerns about high inflation in the short term are now secondary in the minds of the MPC members who believe that downside risks to inflation in the medium term stemming from spare capacity in the economy are far greater than the upside risks of inflation becoming embedded in people’s expectations.
“Although we agree with this view, we believe that more QE has now crossed its buy-back date and are sceptical about its effectiveness in boosting growth. Long term gilt rates have now been pushed down to all-time lows and it is hard to see another QE effect here. Asset prices may not respond given the current uncertainty in the market. Moreover, even if this cash does find its way into the coffers of large companies, they are likely to sit on the cash rather than invest it. The QE programme is scheduled to be completed within 4 months, and we eagerly await how its impact on the economy will unfold.”