Why?

Because the banks have used the money to rebuild their balance sheets rather than start lending to homes and businesses, which is what it was supposed to do.

To argue it is spent into the wider economy is like saying theft is ok as long as the thief is a spendthrift and the money ends up back out there.

No, it is not OK. At some stage the QE will need to be reversed and I do not trust the Government selling bonds and then destroying the proceeds.

To Kevin, please correct me if I’m wrong, these things often make my head hurt, but surely the fact that the QE programme is buying up gilts means that more money is flowing into the real economy, because the government debt was previously held in the private sector, and has now been repurchased with money created ex-nihilo, meaning that the new money can be invensted in non-government securities and/or increases in bank deposits and lending. The problem would be if the new money had no effect on bank behaviour. As far as I can tell this is what the BoE is uncertain about, hence is doesn’t know how effective its strategy is!

Other strategies as far as I understand involve either ‘Credit Easing’ where the BoE purchases non-government debt (but this leaves the Bank with a default risk), or some kind of negative interest rate (which has never been tried, there are probably not the correct channels for banks to implement, and would be met with howls of derision from many quarters).

Are you so sure that when inflation starts to move upwards (and it has already shown ‘unexpected’ reluctance to fall into deflation, on the CPI anyway, which is the BoE’s official target measure) that the BoE will reverse QE, and start selling these billions of gilts into the marketplace, whatever the conditions at the time?

On any measure the govt will require to borrow many billions for many years to come. If £200bn of additional gilts are fed back into the market the price will plummet and rates will rise. Thus cutting off any nascent economic recovery.

Do you REALLY think the govt of the day will allow an ‘independent’ BoE to send us back into recession? Not a chance. They will just adjust the level of the inflation target range from 2%, to 4% and then 6 or 8%. That gilts will never leave the BoE vaults.

However Emma, although the BoE is meant to act in the way you say, it’s purchasing of gilts as opposed to any other forms is revealing. It is buying back the debt rather than pumping money into the real economy, although there are obviously other benefits in monetary terms to reducing the burden in such a way.

And inflation is not a tax on everyone equally but on people with cash balances and sticky rates of pay.

I do actually appreciate the reality that BoE has its inflation target to meet, and the underlying economy is probably deflationary.

It’s hard to know what else they could do – the problem is what happens when the money hits the actual economy?

The Bank of England MPC has one task, to maintain inflation at its target rate, that is, to ensure the purchasing power of currency changes at its expected rate (small positive inflation, because that is easier). It has no interest in altering the purchasing power of money beyond this, because to do so with destroy its credibility. Given the economic situation, QE and other monetary policy instruments are entirely appropriate – given the relative ineffectiveness of the 2 week repo rate (the BoE ‘base rate’) in present circumstances – and is completely in line with standard macroeconomics.

It is not about transfering money to the banks, nor subsidising the governments debt – that is the point of BoE independence. Whether monetary policy is working or not, is another matter!