Jury’s out on ‘quantitative easing’ measures_2

12 Mar 09
Experts have given a cautious welcome to the government’s attempt to get the economy back on track with the unprecedented measure of quantitative easing

13 March 2009

By Alex Klaushofer

Experts have given a cautious welcome to the government’s attempt to get the economy back on track with the unprecedented measure of quantitative easing.

Last week the Bank of England announced it would boost bank reserves by buying £75bn of assets over the next three months from financial institutions by creating money. The first purchase of £2bn of government bonds took place on March 11.

Tony Dolphin, senior economist at the Institute for Public Policy Research, said that while there was a danger that banks might hoard the cash, it could help prompt them to start lending again.

‘It does get you nearer to the point when you start to return to normal again,’ he said. ‘I think it’s the right thing to do, but it doesn’t guarantee success.’ Martin Weale, director of the National Institute of Economic and Social Research, also welcomed the decision.

‘I think there’s really no alternative,’ he said. ‘The policy of quantitative easing might help, but it is a pity that it is not focused more on supporting the market for corporate debt since that would help businesses more directly.’

Dolphin said that, in the long term, the monetary policy could have a positive effect on public spending. ‘The best thing for sorting out the public finances is to get the economy growing again,’ he said.

As a result, future public spending cuts resulting from an attempt to balance the government’s books in the wake of the bank bail-outs might be less drastic than predicted, he added. ‘I’d be surprised if you couldn’t eliminate half the deficit just by growing the economy.’

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