UK, US Suggest QE Might Actually Work

The Bank of England decided last Thursday to continue its monetary policy based on quantitative easing. Partially due to the weakness of the Eurozone countries, the Bank of England committed to issuing another 50 billion pounds through QE to improve liquidity, so businesses can take out loans and continue to expand. Because about 40% of Britain's exports are sent to eurozone economies, there is considerable worry about a possible slowdown in British exports. However, Mervyn King, the Governor of the Bank of England, expressed a sense of slight optimism about the crisis still looming over Europe in a recent statement, mentioning that the recession has yet to reach Britain, and suggesting that the country could be positioned well for the future. The Bank of England's goal of bringing inflation closer to its 2% target by November of this year, and an expected subsequent rise in real wages, should encourage a gradual recovery this year, it is believed. Analysts remain hopeful, too, thanks to recent macroeconomic data that demonstrated an increase in industrial production in December and a reduction in the Britain's trade deficit. Additionally, analysts expect another round of QE in Britain in May, bringing the total amount of monetary stimulus to 375 billion pounds and further increasing liquidity. The aim of the Bank of England's policy is to provide liquidity to the economy by essentially “printing” money electronically. QE increases the excess reserves of banks, which then theoretically increases the total amount of money in circulation. The Bank of England's approach has been adopted from similar tactics employed by the Federal Reserve and Japan's central bank in the past to fight deflation and economic stagnation. It is different than the approach the European Central Bank has taken. The ECB's mandate is to maintain price stability, effectively prohibiting quantitative easing. Instead, the European Central Bank has relied on alternative methods of stimulus, with questionable results. Yet, with the entire continent of Europe feeling the threat of a deep recession, it might be best to do whatever can promote economic growth the fastest. The Bank of England's policy of QE helped to prevent a credit crunch, which is paramount if growth is going to occur, and now the country looks to be on the right track. Recent economic data in the US also seems to be reaffirming the soundness of QE, as well. In particular, the US has posted impressive job numbers as of late. Meanwhile in Europe, with the exception of Germany, it looks like unemployment is on the rise. It may be time for the European Central Bank to rethink its strategies, and follow the example countries like Britain and the US are setting.