So the Bank of England unveiled its 4th round of quantitative easing this week, hoping to boost growth with another £50 billion in stimulus. This comes in addition to the £325 billion the central bank has printed since 2008. Yet, though the principle of boosting growth is a good one, quantitative easing has come in for increasing flack lately. So is it, in fact, a good thing or not?
No boost to the economy?
The most serious criticism to be levelled at the BoE scheme is that it’s failed to boost lending to the real economy. This is after all the essential idea behind it: if the BoE buys government gilts, that frees commercial banks to increase lending to businesses. Yet since 2008, real lending has remained stagnant, if not declined, indicating that, instead of lending, banks are holding onto the money.
Of course, you might argue that, had the central bank not taken action, lending to the real economy might have dried up entirely, as banks went to extreme lengths to strengthen their balance sheets. But to dedicate £375 billion to the UK’s banks, given both their shattered reputation, and the trillions in aid they’ve already received, seems a debatable practice at best.
A pain to pensioners?
In addition, there’s also an argument to be made that QE hurts pensioners. Pensioners depend on the value of annuities for their income, which are linked to the yields of UK gilts (the amount of interest they generate.)
Yet QE depends on the BoE buying gilts, therefore reducing their yields as they enjoy a regular source of demand. That in turn hits annuities, which hits pensioners.
For example, while someone beginning to claim their pension in 2008 might have received an annuity rate of 6.8% or so, today that’s fallen to just 5.0%. In other words, quantitative easing has a direct impact on the return pensioners receive.
Increasing the cost of living?
Furthermore, there’s also the point that QE drives inflation. This is because, if there’s more money in the UK economy, then each pound is worth less. To compensate for that, businesses must raise the price of their goods and services. But because people’s incomes tend not to rise at the same rate, this eats into people’s spending power. That’s a drag on growth.
This also applies to people’s savings too. If the rate of inflation increases because of quantitative easing, yet interest rates remain low, the savings people hold in banks are effectively devalued. In other words, people’s savings actually become worth less over time.
So why do it?
Given all this, you might quite reasonably ask: Why is the Bank of England continuing with this policy? Well, the fact is, that with the UK in a deepening depression, and interest rates already at record lows, the BoE needs to do something to stimulate growth. Encouraging lending through QE just happens to be the best tool left in its arsenal, in spite of its questionable effects elsewhere.
What do you think? Is the Bank of England right to continue with quantitative easing?