Slow recovery and limited credit behind QE extension
A SLOW economic recovery and the likelihood that credit will remain limited as banks repair their balance sheets were behind the Bank of England’s decision to extend quantitative easing (QE) by £25bn yesterday.
The Bank said stimulus measures were still working their way through the economy from the substantial easing in monetary and fiscal policy.
But it judged that the loss in potential output as a result of the recession would mean “a substantial margin of under-utilised resources persists, which will continue to bear down on inflation for some time to come”. But this will be offset in the short run by the impact of the past depreciation of sterling, which indicates that the Monetary Policy Committee (MPC) has probably again raised its near-term inflation forecast.
But only £25bn will be pumped into the economy over the next three months, which indicates that the Bank will be conducting its asset purchases at half the previous rate.
But there was no real guidance in the Banks comments as to what prompted the MPC to extend QE by £25bn, said Citi’s Michael Saunders.
He added: “The MPC just cites its inflation forecast, but has never really identified how it believes any given amount of QE affects prospects for growth and inflation.”