"The Bank of England’s Monetary Policy Committee today voted to maintain the official Bank Rate paid on commercial bank reserves at 0.5%. The Committee also voted to continue with its programme of asset purchases financed by the issuance of central bank reserves and to increase its size by £50 billion to a total of £125 billion"
MPC press statement today
So, it seems that £75 billion was not enough. The Bank of England now needs to increase the Asset Purchase Scheme to £125 billion, an increase of £50 billion. It needs authorization to buy up to 10 percent of GDP in government assets to save the UK economy from the consequences of the financial crisis.
The funny thing is that so far the Bank of England has purchased £21 billion; they had plenty of room under the existing arrangement, but still felt that they needed more purchasing power. Why did they feel the need to increase the scheme? The answer? Forget deflation; think fiscal.
The MPC claim that quantitative easing is about avoiding deflation. Yet, it had to acknowledge today that this justification does not sit easily with recent inflation data. As the press release said: "CPI inflation was 2.9 percent in March, significantly higher than the 2 percent inflation target.”
The deflation justification looks even more dubious when we look at recent press reports, which suggest that the economy has reached a bottom and a recovery will soon be underway. On the one hand, monetary policy is being conducted as if we face a catastrophic collapse in consumer prices. On the other hand, the economy is through the worst and growth will soon resume.
If the latter is true, then the quantitative easing is not necessary. In fact, if the economy is about to recover then these asset purchases will inject a huge amount of cash into the economy, which will inevitably lead to a surge in inflation.
How can we make sense of this contradiction? It is to recognize that the Bank of England is not being honest about the true purpose of this scheme. The asset purchase scheme is not about avoiding deflation. It is about about filling the fiscal gap. It's about generating cash for a government that is likely to be shut out of debt markets and has allowed expenditure is to run out of control while at the same time cutting taxes.
Quantitative easing is about fiscal policy. Having lost its independence, the Bank of England is working with New Labour. Together, they are trying to delay the inevitable reckoning that comes from the macroeconomic mess that Brown and Darling have inflicted upon the UK economy.