Citi economist Michael Saunders doesn’t expect quantitative easing to happen in Britain just yet.
His reasons for thinking that, however, are rather depressing…
For a start, the BoE has other non-QE options:
…the very high level of credit spreads gives central banks ample room to improve financial conditions (by getting credit spreads down) even if policy rates are zero. So, measures such as the debt guarantees for banks, special liquidity scheme, and bank recapitalisation are all, in a sense, part of the options for further easing if policy rates fall to zero, even through they are not usually classed as quantitative easing.
These unconventional policy options are not generally desirable in normal times. In particular, many have large exit costs, in the sense that once started they may be hard to withdraw from… Moreover, most of these measures are much less flexible than monetary policy, which can be adjusted in small steps as frequently as needed.
But, such unconventional measures are better than the alternative of doing nothing if policy rates are at zero and the economy remains in recession. Inaction under those conditions would not only have a large economic and social cost, in terms of lost jobs and business failures, but would also probably lead to far more damaging policy responses (e.g. loss of central bank independence, trade protectionism).BUT, the really depressing part is why Saunders thinks QE won’t be needed:
Nevertheless, for the UK, which is a relatively open economy, and has a sizeable current account deficit, high external debts and negative net external asset position, it may be that even the possibility of zero rates or quantitative easing would cause such a rapid collapse in sterling - lifting exports and inflation — that actual quantitative easing will not be needed. For example, the pound has fallen 13% since early October in trade-weighted terms — with no need for FX intervention to help it fall - as discussion of the possibility of zero rates has started to grow. Historically, the UK has found it all too easy to produce high inflation through expansionary monetary policy and a collapsing currency…
Err, hurrah?
Further depressing matters — in many ways, Saunders continues:
As yet, the pound’s drop has not reached a stage that will totally stop the MPC easing, or rules out zero rates. But, the balance of risks could yet shift if the pound drops so far that it swings from a helpful source of stimulus to become a new source of instability.
Any one for the euro?
Related links:
Sterling smashed again - FT Alphaville
The pictorial quantitative easing - FT Alphaville
The dollar is in freefall - FT Alphaville
