To continue QE or not to continue QE

It is very difficult to predict whether the Bank of England will extend its programme of quantitative easing tomorrow. I can see little reason to change my earlier guess that the Monetary Policy Committee will both seek permission to raise the size of the existing £175bn QE programme from the Treasury and continue its purchases of government bonds in coming months.

In taking this view I was in line with two-thirds of analysts  in the latest Reuters poll who were evenly split between forecasting a £25bn and £50bn increase in QE over the next three months. But no one is at all sure.

Why are things so uncertain?

The only consistent thing about the Bank of England is its inconsistency over the way it thinks QE is working. First, the programme was all about boosting the money supply, then bank lending was considered paramount, then bank lending and money supply were not deemed necessary for QE to work,  and most recently we were told the good work of QE was most visible in government bond yields. Since no one really knows what the Bank wants QE to achieve, it is impossible to know when the MPC will think it has done enough. This is particularly true as the MPC is not clear about whether it believes monetary policy is impaired.The Bank is not at all clear about how much spare capacity it thinks there is in the economy. Not a lot, if its August forecast of inflation rising back to its 2 per cent inflation target, is to be believed. But in his interview with the FT, Paul Fisher, the head of markets, suggested there would still be a “quite a significant” degree of spare capacity over the forecast horizon. If the former is true, there is not much room for more QE, if the latter is true, there is little reason why the printing presses should not continue to pump out the stuff.No one is sure how the MPC will treat the official preliminary statistics showing a third quarter contraction of 0.4 per cent. If the MPC takes this at face value, it makes more QE likely. If it dismisses the figure as random noise, the opposite applies. In the past, the Bank has published papers casting doubt on the initial GDP estimate, but it has been quieter on this research since the recession started.The MPC is not being open about whether it believes the main channel through which QE operates is confidence. A view, widely held within the Bank, is that QE is something of a con trick and that it works by persuading markets and the public that it works. There must be something in this, although it is not measurable. If so, it is not necessarily the the stock of QE that matters, but the level and flow of QE which is consistent with everyone believing that the economy is beating the recession. If this (publicly unmentionable) view permeates among the MPC, all bets are off.

It is probably too much to hope that these questions are cleared up tomorrow.

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