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Coffee House

QE is no substitute for a growth strategy

5 July 2012

1:00 PM

5 July 2012

1:00 PM

So the Bank of England is firing up the presses again, and injecting another £50 billion of Quantitative Easing (on top of the £325 billion we’ve had so far), in a desperate bid to get the economy moving.

The Bank’s certainly right that growth’s not forthcoming. GDP in the first quarter of this year was 0.2 per cent below where it was in the first quarter of 2011, and the prospects for Q2 aren’t looking too bright either — especially with the extra Jubilee bank holiday. Some are hoping that the Olympics will help brighten the picture in Q3 — David Cameron says he’s ‘confident that we can derive over £13bn benefit to the UK economy over the next four years as a result of hosting the Games’ — but that sounds more like wishful thinking than realistic prediction. Based on his analysis of the economic impact of previous Olympics, Citi’s Michael Saunders says ‘we have already had the Olympics growth boost’ and shouldn’t expect any further economic advantage from the Games.

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So will QE3 be any more help? Certainly it should allow George Osborne to continue boasting about Britain’s low interest rates. The Bank of England estimates that the £200 billion of QE1 lowered gilt rates by 100-125 basis points, so the cumulative effect of £375 billion could well be a reduction of over 200 basis points. So today’s 1.7 per cent gilt rates would be more like 3.7 per cent without the help of the Bank’s money printing. The lower borrowing rates in turn keep down the government’s debt interest payments, helping reduce total spending and slow (slightly) the accumulation of debt.

But in terms of helping GDP, we shouldn’t get overexcited. The Bank estimates that QE1 boosted GDP by 1.5 to 2 per cent, suggesting that today’s round will be worth no more than 0.5 per cent growth. That’s certainly better than zero, but QE is no substitute for an actual growth strategy. And the cost? You’ll feel that in your shopping bills, as QE pushes up prices. The Bank says QE1 added 0.75 to 1.5 percentage points to inflation, so this round will likely add another 0.3 points or so. With inflation having fallen to 2.8 per cent in May, the Bank doesn’t seem too worried about that. But with earnings forecast to grow by just 2.3 per cent this year, the squeeze on family budgets is still very real and today’s decision will add to it.

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