 |
© 2009 Deloitte LLP. All rights reserved. Deloitte refers to one or more of Deloitte Touche Tohmatsu, a Swiss Verein, and its network of member firms, each of which is a legally separate and independent entity.
Please see About Deloitte for a detailed description of the legal structure of Deloitte Touche Tohmatsu and its Member Firms.
QE increased – but even more might yet be neededRoger Bootle’s response to November’s MPC meeting |
Publish date:
- The Monetary Policy Committee (MPC) did the right thing today in extending its policy of asset purchases. But with the recession yet to end and the threat of deflation still lurking in the background, the size of the increase – another £25bn of asset purchases spread over the next 3 months – was disappointing. The Committee should not be scared of pumping billions more into the economy if the economic recovery remains slow to get off the ground.
- £25bn might sound like a lot of money, but the Committee has already spent some £175bn with limited impact on the economy. The biggest effect has been on pushing up asset prices. But the impact on bank lending has been negligible, while growth of the broad money supply remains disappointingly weak. In fact, the MPC’s preferred measure of broad money – the snappily named M4 excluding intermediate other financial corporations – fell by 0.9% in September.
- Meanwhile, the fiscal consolidation is looming ever closer. I think that the fiscal squeeze will reduce annual GDP growth by 1% compared to if public spending were kept broadly stable. And compared to the growth rates seen during the spending splurge of the past decade, the squeeze could knock around 2% off annual GDP growth.
- No doubt today’s extension of QE will spark another wave of concern about an eventual surge in inflation. And it is true that if this extra liquidity were left in the system once the economy had recovered, then inflation in due course would pick up.
- But there are bigger and more immediate risks to be concerned with. QE can only create inflation by first boosting nominal demand. Even then, the recovery needs to get close to exhausting the spare capacity in the economy before the inflationary danger lights up – and with output having fallen by almost 6% during this recession, the amount of slack that exists is huge. Given that so far QE isn’t even having that much impact on demand, at the moment we’re barely getting past first base. What’s more, even if inflation does start to look like it is becoming a concern, QE can be quickly reversed.
- But I think that point is a long way off. Although inflation is likely to rise back above its target early next year due to rising petrol prices and the reversal of the VAT cut, it is unlikely to remain there for long. I continue to think that inflation could be negative by 2011 or even the end of 2010.
- The MPC should therefore be prepared to step up its support for the economy even further if necessary. It should not stop until economic recovery is well established and can reliably withstand the coming fiscal tightening. That looks like being some way into the future.
Ends
Notes for editors
This press release has been prepared by Roger Bootle, Economic Adviser to Deloitte. If you have any questions regarding the views in it, please contact Roger Bootle directly on 07887 955 875 or 020 7823 5000 or via email on business@capitaleconomics.com.
This press release contains general information only and is not intended to be comprehensive nor to provide professional advice. It is not a substitute for such professional advice and should not be acted on or relied upon or used as a basis for any decision or action that may affect you or your business. Deloitte LLP accepts no duty of care or liability for any loss occasioned to any person acting or refraining from acting as a result of any material in this publication.
About Deloitte
In this press release references to Deloitte are references to Deloitte LLP, which is among the country's leading professional services firms.
Deloitte LLP is the United Kingdom member firm of Deloitte Touche Tohmatsu (‘DTT’), a Swiss Verein, whose member firms are legally separate and independent entities. Please see www.deloitte.co.uk\about for a detailed description of the legal structure of DTT and its member firms.
The information contained in this press release is correct at the time of going to press.
Last Updated:
Contacts
- Name:
- Jamie Harley
- Company:
- Deloitte LLP
- Job Title:
- Co-Head of PR
- Phone:
- +44 (0) 20 7303 5037
- jaharley@deloitte.co.uk