Bank of England Increases QE £50BN

The Bank of England has left interest rates unchanged. However, it has increased quantitative easing by £50BN over the next four months.

The rationale for turning on the printing presses again being the persistent lack of economic growth, slowing export markets and weak business indicators.

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Double Dip Recession Looms

The Telegraph reports that the West is facing the threat of a double-dip recession; after key measures of confidence collapsed in both the United States and Europe, with Germany suffering the steepest one-month fall since records began in the 1970s.



Whilst the USA is mulling a further round of QE, Europe is frozen like a rabbit in the headlights. Member states are bickering as to what should be done, the ECB has blundered by increasing rates this year and Germany is a house divided as the true costs of the Euro expiration are becoming apparent.



Unlesds both the USA and Europe act in unison the double dip is a certainty.

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Upsy Downsy

The FTSE is "enjoying" an up and down day, flirting with being a bear and now staging a modest recovery.



It appears that there are rumours of further quantitative easing ahead.

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Why Do More?

Ben Bernanke, the Federal Reserve Chairman, has given the first ever Fed press conference.

In it he said that quantitative easing will end in June.

Quoted by the Telegraph he said:

"Why do more?"

However, as the Dollar continues to fall and debt continues to increase, the only large scale buyer of US debt on the market is the US government. As such, quantitative easing is destined to continue in some form or another.

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Inflation Near To 2% In Two years

The Bank of England has stated that, in its view, inflation will be near to the 2% mark within the next two years.

This view is contrary to some of the prophets of doom who have recently been predicting (for media sound bite purposes) that interest rates will have to be raised significantly (8%), in order to counteract an inflationary disaster.

Additionally, given the better than expected growth figures for the UK economy, the Bank has held back from another round of quantitative easing (unlike the Federal Reserve).

This, in terms or international politics, is probably no bad thing. The US QE2 package of $600BN has provoked a barrage of criticism from both Europe and Asia Pacific, and brought the world one step closer towards "currency wars" (capital restrictions, protectionism etc).

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Outlook - Stormy G20 Predicted

The atmosphere at the forthcoming G20 summit in Seoul later this week is likely to be somewhat heated, following on from pre summit soundbites issued by the Chinese and then Barack Obama over the recent move by the US Federal reserve to print $600BN (Quantitative Easing 2).

China, and some other countries, are not happy that this tactic pushes the Dollar lower, thus making their exports to the US more expensive and the lessening the value of their Dollar based investments.

Barack Obama responded, during a press conference in India, by saying that QE2 would bring about higher US growth rates which would be "good for the world as a whole". The US is also of the view that the Chinese Yuan is undervalued, and are pressing the Chinese to let it float higher.

The G20 will see an intensification of this "spat", as various countries begin to draw battle lines over possible future "currency wars".

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Steady As She Goes?

Despite the fact that the US has launched a new round of quantitative easing ($600BN), the Bank of England has decided not yet to follow the American lead.

The Bank of England's monetary policy committee (MPC) has kept interest rates at 0.5%, and has not increased quantitative easing.

The "steady as she goes" approach is a consequence of better than expected UK economic data. As to whether the economy continues to recover, once government cuts and the new VAT rate kicks in next year, remains to be seen.

It should also be noted that the $600BN quantitative easing package in the US may not actually be enough to kick start that economy which, if it doesn't pick up, will have ramifications in the UK and the rest of the world.

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More Quantitative Easing

Judging by signals from both the Chancellor and the MPC, the Bank of England is gearing up to increase its level of quantitative easing (currently around £200BN).

The Telegraph quotes George Osborne:

"The country needs a decisive plan, we've set out the decisive plan.

It has some caution built into it, there is of course the freedom for the Bank of England to deploy monetary policy tools as well."

QE is where the government "prints" new money and uses it to purchase gilts, corporate bonds and commercial paper. Thus it ends up paying the interest owed on the government debt purchased to itself.

As and when the cuts cause excessive political problems, or simply do not work, the government (in the guise of the Bank of England) will print money.

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Currency Wars

Dominique Strauss-Kahn, the head of the IMF, has warned that cuts in interest rates and quantitative easing (as recently announced by the central bank of Japan) could upset the global economy recovery and trigger "currency wars".

The Japanese central bank is reverting to a "zero interest rate" policy (which it abandoned in 2006).

Given that both the US and UK have cut rates and instituted quantitative easing, Mr Strauss-Kahn's comments seem a little "behind the curve".

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Murky

Despite Vince Cable's speech to the Liberal Democrat conference today, in which he refers to "murky corporate practices" and notes that "capitalism kills competition"; the capitalist world to which he refers is the world that he, and the rest of us, live in and rely upon for our survival.

To this end, ie the survival of our capitalist economy, the Bank of England are considering a further economic stimulus.

The recent Monetary Policy Committee (MPC) minutes show that there is a gradual movement within the committee towards doing more to support the economy. Given that interest rates are at 0.5%, the main alternative open to the Bank is that of further quantitative easing.

The US Federal Reserve has already signaled that it may restart purchases of government debt, ie quantitative easing. Given that the US and UK central banks are coordinating their monetary policy, it is highly likely the the Bank of England will follow suit.

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Three Way Split

It seems that the Bank of England's Monetary Policy Committee (MPC) has suffered something of a three way split, with regards to what is the best course of action to take re stimulating the economy.

That at least is the inference to be drawn from the minutes from the MPC meeting this month.

Despite finally deciding to increase the level of quantitative easing (QE) by £25BN, the committee was divided three ways.

Spencer Dale wanted to leave it at £175BN, while David Miles wanted to increase it by £40BN.

The other seven members opted for the £25BN.

Time will tell as to which faction is right.

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The Longest Recession on Record

Figures released this morning show that GDP fell by 0.4% in Q3, making this the longest recession on record.

Pundits had been expecting, and Gordon "no more boom and bust" Brown had been hoping for, a small increase in GDP. Indeed the BBC "Ceefax" news this morning briefly reported that we had pulled out of recession (so much for reporting real news, real time!).

Undaunted, Alistair Darling claimed that growth will return by the end of the year. However, his prediction was dismissed by others as being nonsense.

Clearly the Bank of England will have to continue with its policy of quantitative easing, having used up its other weapons by reaching near zero interest rates.

Any recovery will be slow and patchy.

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King Outvoted

Mervyn King, Governor of the Bank of England, wss outvoted (6-3) by fellow members of the Monetary Policy Committee on 6 August when he and two others argued for a £75BN injection of cash into the economy via quantitative easing.

Instead the Committee settled for £50BN.

Given that the injection in itself came as a surprise to many, it is clear that the Bank has greater concerns about the economy than it may be stating in public.

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£50BN Bung

The Bank of England surprised the markets yesterday by announcing an unexpected extra £50BN in quantitative easing to buy government and corporate bonds, thus raising the total value of the quantitative easing plan from £75BN to £125BN.

The unexpected move indicates that the strength and timing of the recovery is still very much uncertain.

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Where No Man Has Gone Before

The Bank of England had a "Star Trek" moment yesterday, as it lowered interest rates to 0.5% (the lowest in the UK's history) and committed to pump in £75BN into the UK economy over the next 3 months via quantitative easing (printing money).

Quantitative easing has never been attempted in the UK, when the Japanese tried it in the 1990's it had little success.

As to whether these policy measures will work is anyone's guess, we are entering uncharted territory and going where no man (UK central banker) has gone before.

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Interest Rates To Fall

It looks a racing certainty that the Bank of England will announce later today a cut in interest rates from 1% to 0.5%.

Given that this leaves it little manoeuvring room for further cuts, the Bank will also start the process of quantitative easing (ie printing money).

The objective of both of the policy instruments is to ease the credit drought, to try to bring the economy back to life.

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Roll The Presses!

The Times reports that the Bank of England will write to the Chancellor asking permission to start printing money (quantitative easing), in order to buy up government and other securities.

The Bank, having almost exhausted its interest rate arsenal, is hoping that this will ease the credit drought.

All well and good, but this should have been done quite some time ago.

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Bank Of England Cuts Rates Again

The Bank of England cut rates again yesterday (from 1.5% to 1%), in another attempt to draw a red line under the recession and falling confidence.

Not a moment too soon, judging by the report in the Times that notes that the number of businesses filing for administration (after adjustments for one multi operation failure) in the last quarter of 2008 was 1,289 (a rise of 124%).

However, the Bank of England knows that the rate cuts are meaningless, if banks continue to provide the lifeline of loans and finance to struggling businesses and individuals. To this end it is clear that quantitative easing (ie printing money) is necessary, and will have to be implemented soon.

In other news I am pleased to see that RBS have been reading this site:

Quote:

"I wonder how many of the RBS board will resign for their folly, end eschew generous payoffs?"

RBS have just axed 7 non executive directors, in an attempt to distance itself form those who brought about its destruction.

Quite why RBS needed so many NEDs (given that they allowed Fred "The Shred" and his acolytes to destroy the bank - ie did nothing) remains a mystery.

They would have been well advised to read my advice about the role of NED's, published in 2003. RBS might have been been saved, had they followed that advice.

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King Paves The Way For Quantitative Easing

Mervyn King, Governor of The Bank of England, paved the way for quantitative easing (printing money), or as he put it "unconventional measures", in order to lessen the effects of the recession.

When all else fails, throwing shitpot loads of money at the problem may in the short term alleviate some of the distress.

The irony of this "solution" is that the state is in effect borrowing to get itself out of the problems caused by excess debt, which is exactly how we got here in the first place.

Our economic future has now been mortgaged for decades to come.

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National Lending Scheme

Alistair Darling, exasperated by the banks' refusal to resume lending, is (according to The Times) considering a national lending scheme.

Under the scheme the government would guarantee new lending to businesses, on the condition that it is genuine new lending and not an attempt by the banks to reschedule old loans/debt.

Ironically figures from the Office for National Statistics (ONS) show an unexpected rise of 1.5% in retail sales in the UK last month. Needless to say, the veracity of the figures are being called into question.

Like it or not, unless there are further pro active measures taken by the government and Bank of England, the recession will worsen significantly. Three key measures should be taken instantaneously:

1 Cut interest rates to zero.

2 Initiate a national lending scheme.

3 Initiate a policy of quantitative easing (akin to dropping money from a helicopter), whereby the Bank of England buys debt using government bonds.

These measures will draw a firm line under the rapidly failing economy, and provide the bedrock from which to grow again.

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