Is Quantitative Easing Helping the British Economy?

Last month, the Bank of England decided to extend its quantitative easing monetary policy, increasing its size by £50bn to £175bn. However, with the British economy improving it is unlikely that this week the Governors vote to expand QE further. And although it is too early to make a full assessment of QE’s effectiveness at Trading Economics we think that its impact on the economy may be very limited.

Indeed, the QE program has not been as effective as it seems looking at its size. In fact, £125bn or 9% of annual GDP spent in just five months neither has increased significantly money supply nor improved bank credit availability. For example, while banks' reserves of cash have more than tripled since the bank launched the program in March, the M4 money supply, broad measure of lending in the economy has hardly moved. In the second quarter, the gauge was up just 3.1% from a year earlier, the weakest expansion since 1999. Moreover, net mortgage lending fell in July and bank lending to non-financial companies plunged 1.7% mom and 2.9% yoy in July. In addition, while credit spreads and equities have improved significantly in U.K. since QE implementation, they got better also in other countries using measures like credit easing (U.S.) or actions to improve bank liquidity (EU).

Anna Fedec,
9/8/2009 2:51:37 PM