How effective was quantitative easing?

March 2010

The story
The Bank of England suspended its £200bn quantitative easing (QE) program, as widely predicted, at its February meeting. However, governor Mervyn King kept the door open for a further extension of the policy at a later date. The question was whether there would be any point – had QE actually done any good?

The reaction
The Financial Times noted that the gilt market was an “oasis of calm” when the unprecedented policy was suspended. The Bank suggested that the purchases would “continue to impart a substantial monetary stimulus to the economy for some time to come” but the newspaper noted it could point to few concrete examples of its effectiveness and “no one is really sure”. Journalist Chris Giles blogged on the FT website that the only consistency in the Bank’s communication over QE has been inconsistency over its aims and therefore terms of success.

The Economist likens quantitative easing to a drug that prevented a second global depression but now the side effects are becoming clear. These side effects take the form of asset price bubbles, potential inflation and concerns about total indebtedness. It suggests that at some point the costs will outweigh the benefits.

What next?
Uncertainty over the impact of QE means that central banks including the Bank of England are unlikely to extend the policy in the near future. If the UK economy picks up there will be no need. But if the economy slips back into recession or gilt yields start to rapidly increase, or both, then perhaps there is time for one more throw of the dice.