More QE ‘will achieve little’

The decision by the Bank of England to increase quantitative easing (QE) by another £50 billion will do little to drag Britain out of recession….

The decision by the Bank of England to increase quantitative easing (QE) by another £50 billion will do little to drag Britain out of recession.

This is the view of Schroeders Asset Management's European economist Azad Zangana, who said: "In our view, the additional £50 billion of purchases will do little to stimulate the economy. Gilt yields are close to record lows, leaving little room for a further discount to feed through to banks and households.

"In addition, banks are still under tremendous pressure to deleverage, restricting the amount of lending they are prepared to do."

Mr Zangana added that the eurozone crisis is causing uncertainty and therefore deterring business investment, while austerity measures will also restrict growth.

He suggested this all means the UK is set for 18 months of further "stagnation" and the Bank will respond with more QE at some stage.

Such a gloomy outlook could mean more Britons needing debt help as an ongoing economic downturn may reverse the recent rise in employment.

In turn, this will mean many people who are presently able to pay back what they owe lose the ability to do so as redundancy strikes, meaning they no longer have the income needed to keep up repayments.

The Bank of England's Monetary Policy Committee (MPC) stated such action was needed because the outlook for the economy has deteriorated.

However, with the remit of the MPC being to keep Consumer Prices Index (CPI) inflation as close to two per cent as possible, consumers may be set to benefit from continued falling inflation as the weaker economy causes the increase in the cost of living to moderate.

And in response to this, the MPC said it was acting with more QE because the current situation increased the likelihood of CPI falling below two per cent in the medium term.

Posted by Paul Thacker

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