By Max Clarke
In order to address the deteriorating economic conditions felt here in the UK, as in much of the developed world, the Bank of England is now likely to vote on more quantitative easing (QE).
The Institute of Directors is actively urging the Bank’s seven strong Monetary Policy Committee to vote on an increase in the controversial fiscal policy as the nation remains in the economic doldrums.
Currently the Bank’s asset purchase programme stands at £200 billion, though the prominent business organisation are advocating a further cash injection of £50 billion to facilitate banks’ lending and stimulate the UK’s long overdue private sector recovery.
"The time to launch QE2 has arrived,” said Graeme Leach, the Institute’s Chief Economist. “The downside economic risks are sufficiently great to warrant an extension in quantitative easing now, in order to avoid the risk of a double-dip recession. We already have an L-shaped economic recovery and the hit to business and consumer confidence over the summer risks a slip back into recession, which could have dire fiscal consequences. Expanding QE by £50 billion initially is a sensible and limited response".
Money supply growth is very weak and consequently hopes for sustained economic recovery rest on an increase in the velocity of money (the number of times money changes hands). However, the IoD argues, the velocity of money is just as likely to decline as increase over the coming months and it remains too risky to pin hopes of a continued recovery on an unpredictable velocity of money.
Nick Jones, Chief Economist at leading forex brokers, World First, achoes the calls of the institute of directors in advocating a further cash injection, though he argues that we are unlikely to see such a change in the coming months due to underlying economic indicators:
“It is now likely that the MPC will vote for another round of QE here in the UK, but I feel they will wait until they have a better grasp of the inflation picture before doing so. CPI currently sits at 4.4%, over double the bank’s target.
“I would expect that the minutes of the next BOE meeting (released in a fortnight’s time) will show that a similar number will have voted for an increase in asset purchases this month.”