It says it will also continue with its £175bn quantitative easing scheme but will not extend it this month. Last month the Monetary Policy Committee injected £50bn into the economy to create up to £175bn on the UK’s balance sheet.
As of September 3 some £140bn worth of assets had been purchased under the QE scheme. The MPC expects the QE programme to take another two months to complete, with the scale of the programme continuing to be kept under review. Edward Menashy, chief economist of Charles Stanley, says the governor of the Bank of England Mervyn King stated that QE would take six months before it was possible to assess whether it was working, and those six months are now up.
He says: “On the positive side, QE has depressed gilt yields by as much as 50 to 100 basis points and corporate bond yields by even more. “QE has also boosted UK equities, although it is difficult to quantify how much money investors have switched into shares from gilt sales.” But on the negative side, Menashy says that there have been few signs of an increase in bank lending with money from gilt sales remains stuck in the banking system. Commercial bank reserves at the Bank of England have risen from £45bn (in March 2009) to £161bn (in July 2009), the latest available date. And net lending in July 2009 fell at its fastest pace since records began in 1993, and he says that M4 lending to the private non-financial companies remains “anaemic”. Menashy adds: “The failure of the banks to lend can be attributed to the lack of solvency amongst the banks themselves, the fear of incurring more bad debts in weak economy, or the desire not to borrow on the part of indebted households and companies.”