Page last updated at 11:20 GMT, Thursday, 6 August 2009 12:20 UK

Is quantitative easing working?

By Clare Matheson
Business reporter, BBC news

Money thrown into a crowd
Has the Bank made the right decision in throwing money at the economy?

The Bank of England's Monetary Policy Committee (MPC) has decided to pump an added £50bn into the economy through quantitative easing (QE).

The move increases the size of the scheme to £175bn, £25bn above its original plans to create up to £150bn on the UK's balance sheet, in effect by printing money to boost UK coffers - an unconventional way of countering recession.

It has already been granted permission by the Treasury to create the extra £25bn in funds.

The MPC says it expects it to take up to three months for the latest tranche of QE "funds" to be used up, but the key question is, is the policy working?

According to BBC business editor Robert Peston, successful QE should lead to "lending increases, spending increases, price rises and investors' appetite for risk returning".

And there are very tentative signs of a recovery. House prices are increasing, after 18 months of falls; factories are producing more, retail sales have risen slightly and lending is on the increase - at least in certain financial sectors.

Cash pile

But on a more basic level, most experts are watching money supply data to check that there is an increase in the money sloshing about in the economy.

According to the latest figures from the Bank of England, money supply picked up in the second quarter of 2009 but remained sluggish, with the year-on-year growth its weakest since 1999.

We believe that the full £150bn that's been allocated for this QE should be used
David Frost, BCC

"I think it's still too soon to say whether QE is working. However, looking at the evidence to date there's very little sign of its effectiveness, " said Sunita Bali, senior UK economist at Experian.

"One of the main aims of the policy was to spur lending, and latest data show that bank lending to businesses is actually falling still," she added.

According to the Bank, lending to businesses tumbled by a record £14.7bn between April and June - the biggest fall since records began in 1997 - with retail and manufacturing the worst hit.

Factory boost

However, while manufacturers' order books remain thin, the rate of decline across the sector is slowing, according to the Confederation of British Industry (CBI).

Meanwhile, factory output rose 0.5% in June, the fastest pace of growth since October 2007, according to the Office for National Statistics (ONS), offering some hope for the sector.

David Frost, director general of the British Chamber of Commerce (BCC), added that while there were tentative signs QE was beginning to work, more needed to be done.

In particular Mr Frost is most concerned about a lack of lending getting through to small and medium businesses.

"We believe that the full £150bn that's been allocated for this QE should be used. Then indeed the bank should go beyond that perhaps, raising it to £180bn, really to kick-start this economy into growth," he said.

Opening up

However, there are signs that the markets are beginning to free up with lending within the financial sector posting a £2bn increase.

Clearly, with the state that the banks were in, something had to be done
Peter Bolton King, NAEA

"QE is working, financial services are getting more money from banks and the system, but there's still a long way to go to improve money flows to small and medium businesses," said Steven Alambritis, chief spokesman of the Federation for Small Businesses.

Banks now need to work at opening up money supply to the high street, manufacturing and property-based companies to ensure QE does its job, he added.

Consumers could also be starting to see the benefit of QE. Confidence is rising, and high street sales are on the increase particularly as shop price inflation seems to be slowing down.

But the increase in sales is tempered by the fact that shoppers remain wary of buying up big ticket items as concerns about employment and wages continue to weigh on their minds, as evidenced by the fact that personal loans - often for big purchases such as a new car - fell by £1.3bn in the first six months of the year.

Foundations of improvement?

Looking towards the housing market for signs of any improvement, prices do appear to be picking up with the Halifax, Nationwide and Land Registry all reporting recent - if small - increases.

Lending, once again, appears to be freeing up.

In fact, Bank of England data does show that the number of mortgages approved for house purchases in June rose to 47,584, up from 44,169 the previous month and the highest number since April 2008.

For sale and to let signs
There are small signs storm clouds on the housing market are lifting

Further figures from the Council of Mortgage Lenders also showed a sharp rise in mortgage lending while, according to the British Bankers Association, mortgage approvals hit a 15-month high in June.

But any excitement about the increase in lending and mortgage approvals should be tempered by the fact that these figures are still well down on those seen during the housing boom.

Peter Bolton King, head of the National Association of Estate Agents, added: "Clearly, with the state that the banks were in, something had to be done. Certainly the Bank stepping in ... must have helped, it's got things going."

But he did add that the market is "screaming" for banks to lend more and consumers are finding it hard to get a mortgage "unless they have a thumping great deposit".

So, while the housing industry agrees QE may have begun to have an effect, only time will tell whether the approach is working.



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