http://www.telegraph.co.uk/finance/n...ists-warn.html
Bank of England's £150bn injection may not work, economists warn
Economists have warned that the attempt by the Bank of England to revive Britain's fortunes by injecting up to £150bn into the economy is a high-risk strategy that might not work.
The concern centres on whether the banks will be prepared to lend the extra money sloshing around the economy to businesses and consumers, or whether they will choose to hoard the cash.
The programme's success will be judged by the extent that it boosts the supply of money and credit, the lack of which the Governor, Mervyn King, has described as the biggest single threat to the economy.
Fathom Consulting, set up by a group of former Bank of England economists, described the Bank's plans to buy Government debt and other assets with newly created money as "a step into the dark".
In a note it said: "It is very possible that the UK economy will have shrunk by between 5pc and 7pc in total by the time this recession is over.
"Is that really the sort of environment where banks are willing to expand lending? In such a nasty environment, earning 0pc on one's cash balances may be preferable to potentially earning much less by lending the money out. The crisp new bills could then simply end up gathering dust in bank vaults."
The economists conclude that the impact of the initial £75bn injection over the next three months is "likely to be modest".
The Bank will officially embark on the process, known as quantitative easing, on Wednesday by purchasing £2bn of gilts at an auction. Analysts warned that if the programme fails to improve conditions almost immediately, the markets may suffer another crisis of confidence.
Stephen Lewis at Monument Securities said: "The danger is that the authorities have set the bar of success too high. In claiming that quantitative easing will turn on the credit taps, they run the risk of despair setting in if it fails to generate a revival of bank lending."
Analysts have also suggested that despite being a big number, £150bn might not be enough to have sufficient effect, and the Bank may have to seek authorisation from the Chancellor to extend the programme.
Jonathan Loynes at Capital Economics said: "Even if bank lending and broad money growth increase, this may not translate into a significant rise in economic activity if firms decide not to spend the extra money.
"The upshot is that, while Thursday's adoption of quantitative easing is a welcome step, for now it does not alter our view that the economy will contract sharply this year, and perhaps further next year."
Bank of England's £150bn injection may not work, economists warn
Economists have warned that the attempt by the Bank of England to revive Britain's fortunes by injecting up to £150bn into the economy is a high-risk strategy that might not work.
The concern centres on whether the banks will be prepared to lend the extra money sloshing around the economy to businesses and consumers, or whether they will choose to hoard the cash.
The programme's success will be judged by the extent that it boosts the supply of money and credit, the lack of which the Governor, Mervyn King, has described as the biggest single threat to the economy.
Fathom Consulting, set up by a group of former Bank of England economists, described the Bank's plans to buy Government debt and other assets with newly created money as "a step into the dark".
In a note it said: "It is very possible that the UK economy will have shrunk by between 5pc and 7pc in total by the time this recession is over.
"Is that really the sort of environment where banks are willing to expand lending? In such a nasty environment, earning 0pc on one's cash balances may be preferable to potentially earning much less by lending the money out. The crisp new bills could then simply end up gathering dust in bank vaults."
The economists conclude that the impact of the initial £75bn injection over the next three months is "likely to be modest".
The Bank will officially embark on the process, known as quantitative easing, on Wednesday by purchasing £2bn of gilts at an auction. Analysts warned that if the programme fails to improve conditions almost immediately, the markets may suffer another crisis of confidence.
Stephen Lewis at Monument Securities said: "The danger is that the authorities have set the bar of success too high. In claiming that quantitative easing will turn on the credit taps, they run the risk of despair setting in if it fails to generate a revival of bank lending."
Analysts have also suggested that despite being a big number, £150bn might not be enough to have sufficient effect, and the Bank may have to seek authorisation from the Chancellor to extend the programme.
Jonathan Loynes at Capital Economics said: "Even if bank lending and broad money growth increase, this may not translate into a significant rise in economic activity if firms decide not to spend the extra money.
"The upshot is that, while Thursday's adoption of quantitative easing is a welcome step, for now it does not alter our view that the economy will contract sharply this year, and perhaps further next year."
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