The money will be fed into the economy over the next four months largely through the purchase of gilts, an asset that most fund and portfolio managers are avoiding.
Reaction has been mixed, with Coutts voicing the opinion of those who think the MPC is simply “repeating the mistakes of the past” and buying gilts rather than buying corporate bonds. Sterling reacted badly and immediately fell in value against the dollar while, on the positive side, the FTSE 100 pushed upwards by a little over 2%. However, it did fall against the euro, by close to 1%.
Unfortunately, QE on its own is going to have very little impact in the near term and it does look like George Osborne – who was highly critical of QE when he was in opposition – is a one-trick pony, using QE as his one and only tool to kick-start the UK economy.
The way the UK economy has been in the past three years has been a relative success story when compared to most of Europe and the US, but while it has been growing this modest growth is now starting to slow and the fear is that Q3’s GDP figures are again going to be little more than a positive rounding error of around 0.1%.
Wherever QE has been introduced it has at least made a bad situation more bearable than it would otherwise have been. What it has not done, however, is encourage growth. So instead of simply restarting the printing presses, the government needs to look outside the Bank of England and encourage banks to lend and businesses to borrow.
Unsurprisingly this is precisely what business groups – the British Chambers of Commerce, CBI etc – are calling for but there are other strategists who want the same thing for slightly more altruistic reasons.
QE alone will not kick-start UK economic growth – we know this from experience – so the sooner the government puts in place policies that will get money directly into the corporate sector the better.
