Bank of England must halt QE gilt-buying

Robyn Hall

November 8, 2012

Altman argues that buying gilts does not directly stimulate the economy – it merely distorts asset prices; that Quantative Easing is a policy experiment with damaging side-effects and that the Bank has no idea how to reverse it.

Altman said: “It is essential that the Bank of England holds back on further gilt-buying in November.

“The Bank itself has always admitted that Quantitative Easing is a drastic policy experiment which it has introduced because ‘conventional’ policies had been exhausted.

“Creating new money to buy Government bonds may have been worth trying in 2009 to avoid deflation but the economic problem now is stagflation, not depression.”

Altman said that even as the economy was recovering and inflation stayed above target, the Bank carried on buying more gilts.

She added: “With inflation pressures rising again, the Bank should more carefully assess the effects of QE before instigating any more measures. Buying gilts is effectively interfering with the risk-free interest rate and distorting asset prices. This may feel good short-term, but carries significant longer-term dangers which the Bank has not even begun to address. It has no idea how it will reverse this policy experiment.”

Last month’s ONS National Economic Wellbeing report indicated that QE may actually have been responsible for a slower economic recovery than during both the 1979 and 1990 recessions. The ONS pointed out that the combination of low interest rates and high inflation had disastrous effects on disposable incomes and spending power of millions of households, which weakened economic growth.

Altman said: “QE has also damaged corporate pension funds forcing firms to plug their pension deficits rather than using money to create growth and new jobs. A reassessment of the stance of monetary policy is urgently required and the Bank would do well to carry out more detailed analysis, as well as assessing other stimulus measures, before embarking on any more gilt-buying.

“We clearly need more direct stimulus of economic activity. It would be wise to give ‘Funding for Lending’ a chance and also encourage using pension assets to fund construction and infrastructure projects. These are far more direct way of boosting growth and jobs – and will have much less damaging side effects, than relying on buying gilts that have already been pushed to extreme levels.”

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