Bernard Ginns: In for a penny, in for a pound, in Bank’s £325bn gamble

IN for a penny, in for a pound.

Or, if you are member of the Bank of England’s Monetary Policy Committee, in for £325bn.

This massive sum could rise even higher if more members of the committee follow the lead of colleague David Miles, who voted in favour of a third round of monetary stimulus at the Bank’s policy meeting in June.

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In comments published yesterday, Mr Miles reiterated his support for the measure.

“Do we need a more expansionary monetary policy? ‘Yes’.

“Should it be a substantial change in asset purchases? ‘Yes’.

“Is £50bn a substantial number? ‘Yes, it is’.

“Could one know in advance what is exactly the right amount to do? ‘Absolutely not’.”

I met with Mr Miles at a hotel in East Yorkshire in November last year and asked him to explain the programme’s impact.

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“We are buying assets off pension funds, life insurance companies, people who invest in UK government bonds,” he told me.

“We buy government bonds off them and give them in exchange cash.

“Chances are they are going to use some of that cash in an alternative investment and that money may feed through to the UK equity market.

“More likely it will feed through to the UK corporate bond market, which is going to get money back into the corporate sector.

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“Some of it will flow back into the banking system and at a time when banks are facing some stresses in funding that can do some good as well.”

He claimed that the purpose of the programme was “to try to influence the cost and availability of credit to companies and households and try and boost demand to offset this downturn which to some extent was a reflection of things happening outside the UK”. He maintained that the first round of quantitative easing (QE) – £200bn – added between 1.5 and 2 per cent to gross domestic product in 2009.

But the UK has since fallen into its second recession in four years, despite the efforts of the Bank.

Should we be alarmed that its response is to increase the programme?

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Ros Altmann, the economic policy expert and director general of over-50s group Saga, yesterday called on the Bank to carry out a comprehensive and balanced assessment of the impact of gilt-buying on the economy before it embarks on yet another round of QE.

“It is time the Bank of England stood back and considered whether QE is, indeed, a stimulus to the economy.

“The Bank needs to seriously analyse whether QE has worked and, certainly from current levels, whether it may in fact have no more mileage.”

She said that conjuring up £50bn in new money to buy government debt at expensive levels could be saddling future taxpayers with large losses.

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There is already a damaging divide between the jobless young and equity-rich old.

Ms Altmann went on: “So far the Bank has failed to produce evidence that the policy has actually stimulated growth or employment.

“It has relied on assumptions that the alternative to QE would have been complete economic meltdown.

“This is improvable.”

She claims that QE has forced firms to fund their pension schemes and compelled more than a million pensioners to buy much lower retirement incomes.

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“Distorting the gilt market is dangerous, it undermines our pension system and has side-effects that actually damage growth,” she said.

“This policy may seem to make sense in academic models, but in the real world, with our ageing population and pension system that is underpinned by gilt yields, QE simply may not work.”

According to the world’s central banking supervisor, the Bank of England may be putting the economy at risk by persisting with historically low interest rates of 0.5 per cent and money printing.

“Prolonged and aggressive monetary accommodation may delay the return to a self-sustaining recovery,” said the Swiss-based Bank for International Settlements (BIS).

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“It can undermine the perceived need to deal with banks’ impaired assets.”

BIS claimed that central banks are being cornered into prolonging monetary stimulus as governments drag their feet and adjustment is delayed.

“This intense pressure puts at risk the central banks’ price stability objective, their credibility and, ultimately, their independence,” it added.

You get the feeling that the Bank is running out of ideas.

Persisting with unproven ones could easily do more harm than good.

But are the Bank and its long-serving Governor capable of admitting mistakes?

@bernardginns