20th June 2012
Last night the G-20 summit ended and the world's leaders started to depart from the Mexican tourist destination of Los Cabos. As ever they issued a communiqué and I would like to draw your attention to this sentence in it which covers the Euro:
"We welcome the significant actions taken since the last summit by the Euro Area to support growth, ensure financial stability and promote fiscal responsibility as a contribution to the G20 framework for strong, sustainable and balanced growth."
If we look at what the Euro area had done since the last G-20 summit we can see that it had in fact done nothing of the sort! Economic growth is expected to be negative possibly substantially so in the second quarter of 2012 and rather than being stable Greece's banks have been bailed out yet again and Spain's banks are going to be the recipients of a 100 billion Euro rescue package! I am reminded again of the song by PM Dawn:
"Reality was once a friend of mine"
Still at least the weather was good as I understand that the BBC's Economics Editor Stephanie Flanders got sunburn on her toes.
The likelihood of more Quantitative Easing in the UK
The UK Monetary Policy Committee Minutes
This morning has seen the release of the latest minutes and they contain quite a lot of food for thought. Let us start with the vote on further Quantitative Easing:
"Regarding the stock of asset purchases, five members of the Committee (Charles Bean, Paul Tucker, Ben Broadbent, Spencer Dale and Martin Weale) voted in favour of the proposition. Four members of the Committee voted against the proposition. The Governor, David Miles and Adam Posen preferred to increase the size of the asset purchase programme by £50 billion to a total of £375 billion. Paul Fisher preferred to increase the size of the asset purchase programme by £25 billion to a total of £350 billion."
So the vote at the beginning of this month had been just about as tight as it could be with the no vote only just prevailing 5-4. And we further see that some of the five were not against more QE full stop but were in fact in favour of a delay:
"While acknowledging that further stimulus was likely to become warranted at some point, most members noted that there were several key events occurring over the coming weeks that could have a material bearing on the situation in the euro area and that there was merit in waiting to see how matters evolved there before the MPC reached a conclusion on whether to add any further monetary stimulus."
So I think that at the next meeting of the Monetary Policy Committee on the 4th and 5th of July we are now extremely likely to see a new burst of Quantitative Easing and £50 billion seems to be the likely amount. This would take the total to £375 billion. As they were previously willing to countenance more QE with inflation of double its target then they will be further encouraged by yesterday's figures:
"CPI annual inflation stands at 2.8 per cent in May 2012"
For those interested in the significance of the Governor of the Bank of England being outvoted then if my memory serves me right that has happened before but only once.
The Bank of England has its own "Reality was once a friend of mine" moment
We get told in the MPC minutes that QE achieves this and the emphasis is mine:
"The Committee agreed that asset purchases remained an effective tool for lowering a range of market interest rates, supporting asset prices and so nominal demand."
But when we get to the real economy it says this:
"(a) rise in interest rate spreads on mortgages and loans to small and medium-sized businesses in recent months, despite the extension of the asset purchase programme in February."
Tucked in there is an admittal that it does not and has not worked for the real economy and yet four members of the Monetary Policy Committee voted for more of it!
A Reduction in interest rates was debated too
"The Committee first considered the merits of a reduction in Bank Rate"
We then see something that I consider to be very revealing. The paragraph discussing this matter only discusses the impact of such a move on the banking sector. The real economy does not get a mention!
I do however note that they seem to be slowly becoming aware of an issue I raised back when I started this blog which is the gap between official (i.e base rate) and unofficial interest-rates:
"On the other hand, since early 2009, retail deposit rates had increased somewhat"
I would also like you to look back a paragraph or two to the section where rising mortgage and corporate borrowing rates are also mentioned. Is it rude to point out here that Quantitative Easing of which we have had £325 billion so far is supposed to do this?
"That lowers longer-term borrowing costs"
Perhaps up is the new down. Or "lowers" needs to go into my financial lexicon for these times.
There was also a discussion about bank reserves held at the Bank of England
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