The Bank of England has extended its quantitative easing (QE) programme by £25bn, taking the total sum of printed money injected into the economy to £200bn, or 13% of GDP. Governor Mervyn King, presenting the bank’s quarterly inflation report, said “we’ve a completely open mind” on whether to use more QE. The Bank thinks inflation will rise above the 2% target in the next few months before sliding back well below that figure in two years’ time. It warns that weak demand is likely to temper the recovery, but has also increased its GDP growth forecast to 2% next year and 4% in 2011.
The improvement in recent data continued with the news that unemployment stayed at 7.8% last month. Employment ticked up in the three months to September, although a KPMG survey said employers were likely to keep shedding jobs for the rest of the year.
What the commentators said
A fat lot of good QE has done so far, said Liam Halligan in The Sunday Telegraph. It was supposed to boost bank lending and hence growth. But much of the money has simply ended up in financial markets, inflating “yet another” asset bubble; lending to the non-financial sector “remains in negative territory”.
And while QE hasn’t been able to stop banks and consumers cutting back, there is “zero scope” for the government to provide more stimulus, said Lex in the FT. Indeed, this week ratings agency Fitch warned that due to its huge budget deficit of 13% of GDP, Britain was more at risk of losing its AAA-credit rating than any other top-rated country.
As the IMF pointed out, high levels of public spending pre-recession, along with our “undue reliance” on the City and the housing sector, mean we’re in a worse pickle than most, said Jeremy Warner in The Daily Telegraph. As our overall public debt hurtles above 100%, just paying the interest on the debt will be a struggle, added Halligan. By 2014 we’ll be spending 10% of (now plummeting) tax receipts on servicing our debt, compared to 4% in 2007.
Indeed, we’re at risk of falling into a “debt trap”, said Halligan, whereby we have to borrow just to pay the interest on existing debt, which thus “spirals out of control”. Throw in the danger of a sterling crisis as foreign creditors lose confidence in us, and it’s clear that this is merely “the end of the beginning” of our economic problems.