9 Feb 2012

Three years on, is quantitative easing the way forward?

The three-year anniversary of quantitative easing has been far from “golden” or “diamond”. In fact, by tradition, three years is celebrated with leather. And I can certainly imagine many hundreds of thousands of savers and recently retired wanting to throw their leather uppers at, or near, the Bank of England. Today the bank confirmed that interest rates would remain at their historic low of 0.5 per cent into a third year, as well as £50bn extra of QE.

It is certainly the subject about which the bank gets most correspondence. It’s not just savers who can no longer live off paltry savings income. The annuity industry has been hit by a fall of 20-30 per cent in the annual income that pensioners will be obliged to live off for the rest of their lives.

This is driven by the impact of quantitative easing on UK government bond interest costs, the so-called gilt rate.

As the chancellor never stops boasting, they are at record lows, partly because of the government’s fiscal credibility and partly because Britain has a captive market for its growing debt pile: the Bank of England.

This is having a huge impact on 1-2 million recently or near-retired. These are the prudent savers who did nothing to fuel to crisis, paying the price. It is the flip side of other figures we saw today that repossessions are at their post-crisis lows, despite rising unemployment and a contracting economy. So far the bank has been blind to the distributional impact of its policies.

Low interest rates and QE have prevented a depression, at the cost of a bit more inflation. As we reach three years of what we were told would be a temporary policy, with the markets forecasting another three, four or five years, this is surely no longer tenable.

QE and low interest rates have transferred billions from savers to borrowers, from retirees to buy-to-let speculators, from pensioners to bankers. Do building societies, with no shareholders, even work in an environment of prolonged zero interest rates? It still might be justified in the round. But the government will surely have to look at regulatory or fiscal changes to mitigate the damage.

Even this damage, might be justified if it could be clearly demonstrated that QE was boosting business lending. I expect the Project Merlin figures to disappoint. George Osborne’s credit easing is interesting, but bankers report problems in the details.

Heaven forbid, perhaps it might even be worth looking to the dreaded eurozone, at Frankfurt, where the ECB have launched a different type of QE (which they won’t ever call QE for fear of scaring Germans) which seems to be a laser-guided missile to the heart of the banking and corporate funding markets. As it happens, I am going to see the man that coined the phrase “quantitative easing” for tonight’s show, and he thinks this could show the way forward.

For now, we should reflect that even if it helped prevent a depression, there are millions who won’t be celebrating this leather jubilee.

Follow Faisal on Twitter: @FaisalIslam

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