Titanic or QE2?

The Bank of England unleashed a second round of quantitative easing yesterday in an attempt to kickstart the UK’s flagging economy. Already it is being called QE2. With the Coalition Government seemingly stuck in the tramlines of its austerity programme and interest rates already on the floor, options are limited.

Will it work? A report from the Bank on the last round of QE claims it provided a “significant” benefit to growth and was the equivalent to dropping interest rates by between 1.5 and 3 percentage points.

Not everyone agrees. Much depends on your personal situation. Ros Altmann, director of Saga, speaks for many of the over-50s in describing yesterday’s move as “a Titanic disaster”. Those relying on savings are already being squeezed between very low returns on what they have saved and invested and rising living costs.

Here are people who have heeded the Government’s encouragement to save for their retirement but, having done the right thing, they are now being punished. QE punishes them further by pushing down long-term interest rates, while potentially pushing up inflation. Dr Altmann claims the last round of QE merely “boosted prices, bank bonuses and balance sheets”.

However, a stagnant or shrinking economy helps nobody. Currently slowing economies in the developing world, along with the crises in the US and the Eurozone are shaping up for a perfect economic storm.

Yesterday, the normally cautious Bank of England governor Mervyn King painted a stark picture when he said this was “the most serious financial crisis at least since the 1930s, if not ever”. Clearly the Monetary Policy Committee is now more worried about growth than inflation. The Bank of England cannot rekindle growth without help.

Banks must be pressured into lending more. MPC member Adam Posen has been pressing for a national investment bank to lend directly to small businesses that are being cold-shouldered by pre-existing banks. Such institutions exist in Germany and the US. It is time to consider it.

Meanwhile savers need help, especially since the withdrawal of the NS&I inflation-beating savings bonds. A temporary raising of ISA limits would help hard-pressed pensioners to protect their nest eggs.

When will the Government step in? As the MPC warned yesterday, the squeeze on incomes and George Osborne’s austerity measures will continue to kill retail sales. Yesterday’s move suggests the MPC thinks it more likely that the economy will under- than overshoot its inflation target next year. That may look like good news for savers. Unfortunately it would mean the economy is flat on its back.