Belfast Telegraph

Experts warn that latest QE measures may not be able to save UK

By Peter Cripps and Margaret Canning

The Bank of England and its eurozone counterpart have taken emergency action to breathe life into their struggling economies.

The UK economy - threatened by the deepening crisis on the continent - received a £50bn injection from the BoE as the country struggles to emerge from recession.

In Frankfurt, the European Central Bank (ECB) cut its key interest rate to a record low of 0.75% amid signs the 17-nation currency bloc contracted in the second quarter.

This comes after a period of escalating turmoil in the eurozone, which has seen borrowing costs in countries such as Spain and Italy climb higher.

But economists questioned how much further central banks can go to help.

Dr Esmond Birnie, chief economist to business advisers PwC in Northern Ireland, said: "The decision to restart QE is not unexpected, but it is unlikely to be effective by itself in supporting economic growth and indeed may even hold back a much needed fall in inflation."

He said the Bank's Monetary Policy Committee (MPC) should focus on getting inflation - which fell to 2.8% in May - back to its 2% target.

"This would, in turn, ease the consumer squeeze by boosting real disposable incomes and help to underpin recovery."

But he added: "The Funding for Lending scheme and other measures announced by the Governor of the Bank of England in the recent Mansion House speech may help ease the financial system blockages.

"More emphasis is also needed from the government on supply-side measures that can support the longer term competitiveness of the UK economy - such as reductions in business regulation, medium-term tax reform and a stronger programme of employment and training opportunities for young people."

Tim Ohlenburg, senior economist at the Centre for Economics and Business Research, said: "Central bankers need to reach deep into their toolbox to find ways of propping up prices by somehow stimulating economic growth."

The measures provided a boost to world markets but the rally was shortlived. Both the pound and the euro weakened.

The Bank - which also held interest rates at 0.5% - said its decision came as the eurozone crisis weighed on confidence and hit some of the UK's main export markets.

The UK's economy has barely grown for a year and a half and it warned the weak outlook meant 'the margin of economic slack is now likely to be greater and more persistent'.

It said inflation, which fell to 2.8% in May, was in danger of slipping below its 2% target and its stimulus measures should help sustain a gradual strengthening in output.

Most economists think gross domestic product fell in the second quarter of 2012, following declines of 0.4% and 0.3% in the previous two quarters.

What does QE actually mean and how does it work?

Q What is quantitative easing?

A Simply put, quantitative easing, or QE, is an emergency measure used by policymakers to boost economic growth. When rates cannot go any lower - as is nearly the case in Britain, where they are at a record low of 0.5% - the Bank will pump cash directly into the economy to encourage lending. This is QE.

Q Hasn't the Bank done this before?

A Yes, the Bank started to inject more money into the economy in March 2009 followed by further bouts in October 2011 and February.

Q So why has the Bank increased QE again?

A Banks are worried about the strength of their finances and since the onset of the credit crunch have tightened up lending dramatically.

Q Isn't QE just printing money?

A In effect it is, although the Bank does not literally turn on the printing presses to send a huge flurry of new notes into the economy. The Bank will create the money to buy the assets and credit the reserves of various banks with the new money.

Q How much more money has the Bank said it will create?

A The Bank said it would inject a further £50bn into the economy, bringing the total level of QE to £375bn.

Q So now banks should go out and lend more money?

A This is the 64,000-dollar question. In principle, QE should boost the money supply, but fears of debt contagion from Europe and changes to regulation means banks are being cautious.

Q Will it work?

A A report from the Bank measuring the effect of QE on the economy, found the measure provided a 'significant' benefit to growth. But there are fears that the more money printed, the less effective the policy will be.

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