Quantitative easing isn’t an eternal elixir of economic health. That was the admission from Bank of England Governor Sir Mervyn King last night at a speech in Cardiff. Sir Mervyn said there were limits to the BoE’s policy of printing money to buy bonds, which could not ‘continue indefinitely’:
‘One thing we can see clearly is that the recovery and rebalancing of the UK economy are proceeding at a slow and uncertain pace. At this stage, it is difficult to know whether some of the recent more positive signs will persist. The Monetary Policy Committee will think long and hard before it decides whether or not to make further asset purchases. But should those signs fade, the MPC does stand ready to inject more money into the economy.
‘Printing money is not, however, simply manna from heaven. There are no shortcuts to the necessary adjustment in our economy. The problems in the world economy mean that we shall have to be patient.’
The Governor also warned that banks still have insufficient capital to deal with losses on bad loans, saying ‘I am not sure advanced economies in general will find it easy to get out of their current predicament without creditors acknowledging further likely losses, a significant writing-down of asset values and recapitalisation of their financial systems’.
As Fraser reported in August, research by Sir Mervyn’s own organisation found that the richest tenth of the population benefit from QE while the poorest lose out: the graph below, from the original post, illustrates that starkly.
The Governor did touch on this in his speech:
‘Although this unprecedented degree of monetary loosening has prevented a depression, it has caused pain to those dependent on interest income. And we have not been able to avoid a sharp rise in youth unemployment.’
It’s unlikely any of this will be repeated in the House of Commons chamber, though. As QE does George Osborne a big favour by keeping his borrowing costs low, the government will be reluctant to acknowledge that, even in the Bank’s eyes, this policy has its limits.