Last week marked the three-year anniversary of the Bank of England’s unprecedented commitment to record-low interest rates, accompanied by a multi-billion pound asset purchase programme.
The Bank’s Monetary Policy Committee surprised no-one a few days later when it reaffirmed the overnight interest rate at 0.5%, for the 36th consecutive month.
Equally unsurprising was the announcement that quantitative easing (QE) is going to be held at £325 billion following a £50 billion increase last month.
Mervyn King, the chancellor of the Bank, has staunchly defended this recovery strategy since the outset, reiterating the British economy would have been in far worse a condition had a different course been taken.
But against this unknowable alternative, three years on – with the asset purchase programme showing no signs of slowing and with interest rates likely to remain where they are – can this policy still be described as successful? (News analysis continues below)
Michael Taylor, a senior economist at Lombard Street Research, says the Bank’s course of action was the correct one. He says: “They’ve hit the floor with the bank rate and that was the right thing to do and they’ve done further easing through QE.
“QE has prevented what would have been a sharp contraction in the economy, which would have resulted in a more severe and prolonged economic downturn. Given the course of the economy since we came out of the recession, I think what’ve done so far is right.”
It is clear that markets benefited in the wake of the Bank’s intervention. The FTSE 100 climbed from sub-3,500 to break the 6,000 mark early last year and has remained, on average, above 5,000.
”QE has prevented what would have been a sharp contraction in the economy”
Attempts to stimulate the investment universe have also had a measure of success. Research from the IMA shows that funds under management have grown since 2009, to heights which far exceed pre-crisis levels.
Finally, the aim of bringing down gilt yields can also be said to have had demonstrable success.
Yields on 10-year government bonds have fallen from 4% in March 2009 to 2.17%.
But it was exactly this early economic strength that the British government overlooked at a time when it would have been opportune to change tack, says Simon Ward, the chief economist at Henderson.
Ward was in favour of the policy implementations in 2009, but says the Bank hesitated when strength returned to the economy and has missed the chance to raise interest rates, precipitating more QE.
“They should have raised interest rates modestly in the second half of 2010 and early 2011 as several other central banks around the time were doing.
“That would have reduced the extent at which inflation spiked last year and it would have given them scope to cut interest rates slightly last autumn in response to what was going on in the eurozone.
“They then wouldn’t have had to launch another round of QE, which, like the first round, will prove to be inflationary,” he says. The consequences of this further QE have been easily observed and often loudly denounced.
High levels of inflation, peaking at 5.2% in September 2011, have been consistently eating away at people’s savings as the market continues to be flooded with new capital.
The Bank’s original target of 2% has become so much backround noise although consumer price index inflation did come down to 3.2% last month, the lowest since November 2010.
One of the principle motivations behind the asset purchase programme was to inspire banks to start lending once again, something that has failed to materialise.
Lending targets set up under Project Merlin – the agreement struck between the British government and Barclays, Lloyds Banking Group, the Royal Bank of Scotland and HSBC – have been consistently missed since its inception in February last year.
In May 2011 it was revealed that the £19 billion quarterly lending target for small and medium sized businesses (SMEs) had been missed by more than £2 billion. Jump to February and banks were still failing to meet these lending targets, this time falling short by £1.1 billion.
”They should have raised interest rates modestly in the second half of 2010 and early 2011”
Another worrying impact has been felt by pension funds. Falling gilt yields have pushed final salary pension funds £90 billion deeper into the red since the second wave of QE started last October, says the National Association of Pension Funds.
The widespread consensus is that the historically low rates, coupled with the asset purchase programme, formed the essential course of action to take at the peak of the recession.
As time drags on however, the consequences of these actions are becoming harder to ignore and also more entrenched, leading many to question when the next opportunity for change will come and why it took so long.